When it is possible to make a big profit or lose a lot, most of us will react instinctively. Greedy wants to make a lot of money and become rich, and fearful wants to sell quickly to avoid big losses. This is what makes us poor. Because at this time our emotions often completely overwhelm reason, and it is easy to make mistakes in decision-making. As Buffett said: "Investing must be rational; if you don't understand it, don't invest."
I believe everyone has said: "How can I be so stupid?"
Kahneman, the Nobel laureate in economics, mentioned in his book "Thinking: Fast and Slow" that the reason why we make repeated mistakes in investment decisions is not external, but ourselves. We don't understand our own brains and replace slow thinking with fast thinking. In a very complex and volatile securities market, our unconscious and instinctive fast thinking decisions are often wrong.
First, the brain is divided into two major systems: System 1 for unconscious fast thinking and System 2 for conscious slow thinking.
In Thinking: Fast and Slow, Kahneman uses a term pioneered by psychologists Keith Stanovich and Richard West that there are two systems in the brain, System 1 and System 2.
The operation of System 1 is unconscious, very fast, without much mental effort, you don't feel it at all, and you are completely in a state of voluntary control. For example: determine which of two targets is far and which is near, determine where the sudden sound comes from, detect the unfriendly attitude in the other party's voice, answer what is 2 plus 2, and read the words on the large billboard next to the highway. You do all of these things unconsciously, without interfering with what you are doing at all, as if you did it without any mental effort.
System 2 operates consciously and rather slowly. System 2 operates in a variety of ways, but they all have a common feature. These modes of operation all require concentration, and once the attention is distracted, the operation will be interrupted immediately. For example, calculate what 27 times 14 is equal to, wait for the starting gun to start at any time during a race, pick up someone at the train station, look for a gray-haired old lady in the crowd, fill out the college entrance examination registration form, compare the overall performance of the two cameras, and park the car Get into a tight parking space. All of these things you have to keep your attention on all the time, and you can't turn your attention away until you are done, which consumes a lot of your brain power.
The names of System 1 and System 2 are too mechanized. According to the speed of thinking, we call it fast thinking and slow thinking more vividly. The fast thinking mentioned here is not ordinary fast, but as fast as lightning. You don’t feel that the thinking has been completed. Yes, but the slowness is quite slow, and some take several minutes to several hours or even longer.
The two systems of the brain, fast thinking and slow thinking, have a clear division of labor, and cooperate and coordinate to make the brain run efficiently. As long as you are awake, both systems are active. The fast thinking system operates completely autonomously, and the slow thinking system is usually in an effortless and relaxed state, using only a part of its ability during operation. The fast thinking system responds to external stimuli at any time, forming impressions, feelings, intuitions and other information, and then passing it to the slow thinking system.
If the slow thinking system receives these information, it will transform unconsciousness such as impressions, feelings, and intuitions into conscious thoughts, and transform impulses into autonomous behaviors.
However, occasionally, when the fast thinking system cannot solve the problem, it will seek support from the slow thinking system. For example, instead of calculating 2 plus 2 but multiplying 27 by 14, the slow thinking system will be activated and the brain will consciously focus to solve the problem. When the slow thinking system kicks in, with a high degree of concentration, all problems will be solved.
Second, stupid investment decisions often replace slow thinking with fast thinking.
In most cases, we are in a familiar and simple environment. We only need to think about the system quickly to respond quickly and accurately. We can make short-term predictions about things around us very accurately. When we encounter problems, we will do it first. Responses were quick and correct. However, when encountering an unfamiliar environment, encountering complex things, and needing to solve complex problems, fast thinking often habitually simplifies complex problems and makes big mistakes.
And there is another point, fast thinking is an intuitive feeling, and I know almost nothing about logical reasoning and mathematical statistics. And there is a very big flaw in thinking fast, that is, it operates completely unconsciously and autonomously, and you cannot turn off this system, just like you can't help but read the words on the signboard when you see it on the street.
The securities market is a new environment that we are not familiar with. We humans have a history of hundreds of thousands of years of evolution, but we have only been exposed to the securities market for more than 200 years, while the Chinese securities market has only a history of more than 20 years.
In investing, unconsciously, our quick thinking starts. Let’s see if these ideas are very natural and familiar:
1. The electrical appliances recommended by relatives and friends are often quite good, and the stocks recommended by relatives and friends must also be correct. The results of it? You fell so hard that your teeth fell to the ground.
2. I'm smart at school, I'm smart at work, and I'm definitely smart at investing. The results of it? Most smart people lose more than ordinary people in investment, because they like to pretend to be smart, and the operation of the market is often the opposite of their ideas. Most people will admit their mistakes and correct their own ideas, but smart people are stubborn and want to prove that the market is wrong. of. In 1720, Newton, the greatest scientist, lost a lot in the South Sea Company stock. He sighed: I can calculate the movement of celestial bodies, but I cannot calculate the stupidity of human beings.
3. The more diligent I am at work, the greater my achievements will be, and the more I work hard at investing, the more money I will make. However, statistics show that professional investors who put a lot of effort into investing perform at about the same level as amateur investors.
We can predict changes in the weather, and naturally we can predict the rise and fall of the stock market. However, in fact, no one can continuously predict changes in the stock market. Stock market experts are often experts, but we are still very superstitious about those experts.
4. All of us understand that we must buy low and sell high to make money. But we tend to buy high and sell low, the higher the price, the more we buy, and the lower we sell, the more we sell.
We all feel that we are not ordinary people, we all want to surpass ordinary people, we all think that we can stand out, we all think that we can beat the average level of the market, but the facts show that although many people beat the market every year, only a very small number of people can Consistently beat the market for a long time.
Third, sound investment decisions are an appropriate combination of fast and slow thinking.
Money, especially when it may make a lot of money or lose a lot, will arouse the most primitive and deep emotions of human beings, and it will make us react instinctively, greedily wanting to make a fortune and become rich, fearful and wanting to sell quickly to avoid The risk of big losses makes us poor. At this time, emotions often completely overwhelm rationality, and decision-making mistakes are most likely to occur.
As Ben Graham, the father of security analysis, said: "Although the underlying motive for buying a security is speculative greed, human nature desires to hide this undesirable Logic and feel-good stuff cover it up.” And the only right way to succeed in investing is to use reason to think slowly and operate calmly.
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