This week I am posting a guest blog by Dr. Daniel Crosby
Let’s say you and your significant other are headed out for a night on the town. You’re looking for a trustworthy sitter for your young child and have asked a close friend to describe two potential childcare professionals for the evening. Your friend gives you the following descriptions and you must choose one of the two.
Sitter One is described as intelligent, industrious, impulsive, critical, stubborn, and envious.
Sitter Two is described as envious, stubborn, critical, impulsive, industrious and intelligent.
So, proud mama or papa – which do you choose? Well, you being the bright, special person that you are, you’ve likely figured out that the two lists of adjectives are identical. Odds are though; you had a strong gut reaction that the first sitter is more desirable. This is due to something called the “irrational primacy effect” or the tendency to give greater weight to information that comes earlier in a list or sentence. It turns out that what’s true of communication is also true of our investing lives – the lessons that we learn earliest are some of the most lasting.
Take a moment to consider the first equities you ever purchased. The first time you set aside a portion of your hard-earned paycheck to save for a rainy day. Now, consider the outcome, whether or bullish or bearish, of those earliest investment experiences. Odds are, you are unduly impacted by those earliest vivid memories of being an investor. If the market was bullish, it may have prodded you on toward a life taking appropriate or even excessive risk. If the market was bearish, it may have irrationally seared into your mind that equities were a dangerous place to have your money.
As the parent of a three-year-old, I can personally attest to the amount of time I spend saying “no” and trying to protect my child from things that are scary, dangerous, sugary, or generally bad for her. While this may be developmentally appropriate early in life (she always has had a thing for electrical sockets!) it becomes less so as the child learns, grows, and matures. Although those early memories will always be with you for better or worse, you are not the investor you were then.
If you are being held back by risk aversion borne of your earliest investment experiences, I’d encourage you to become a student of the market. Explore the ways in which bearing risk can be profitable. Learn about the nature of cyclical and secular markets and the opportunities for financial growth that exist in good times and bad. George Santayana famously said that, “Those who cannot learn from history are doomed to repeat it” but learning from your past and being a slave to it or two very different things indeed.
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Educated at Brigham Young and Emory Universities, Dr. Daniel Crosby is a psychologist and behavioral finance expert who helps organizations understand the intersection of mind and markets. His clients include Brinker Capital, Morgan Stanley, RS Funds, Guardian Life Insurance and NASA. Dr. Crosby’s well-reviewed book, “You’re Not That Great” applies elements of behavioral finance such as loss aversion and availability heuristic to the pursuit of a meaningful life. You can follow Dr. Crosby (@incblot) on Twitter.