Charlie Munger – Cognitive Biases – Liking loving Bias

This is one of my favorites. When you hear a trader say, “I love this stock.” You know they are preparing themselves for distorted facts, ignoring reality and misinterpretation of the facts merely because of their affection towards the stock.

Yes, I said affection.  My belief is that similar to relationships we become married, infatuated, angered and involved emotionally with stocks.  The relationship can last for a couple hours (a fling) or for months, even years (marriage).  As you develop this relationship, regardless of time, you develop feelings.  You’ll hear this in traders talk. “I love this stock.” “I understand how it moves.” “I just get it with this one.”  Sound familiar?

It’s great you found your love and if it’s healthy, you’ll be profitable.  However, there are biases you will experience because you have developed feelings.

  • Not believing the pattern:  Your significant other always buys you ice cream after the market closes.  Last Friday they didn’t show up with ice cream.  You may dismiss this as an anomaly but the truth is your significant other meet someone else and will no longer be bringing you ice cream, you just have no idea.  Monday you wait, Tuesday… you get the idea. Mean while you’re pissing away money waiting for the same pattern to develop that is now gone.  Guess what. Time to move on.
  • Distorting Reality:  2 weeks go by and you are still trying to catch that same pattern.  It finally happens and you say, “omg yes finally, she’s back.” but it turns out they just had a fight and you’re still shit outta luck.  This also reinforces the operant conditioning that has been happening.  Your perception of reality is no longer accurate, you make allowances that you would not normally make because you have feelings.

Feelings aren’t all bad in the market but the right ones are key.  When “the stars align,” you just know.  It’s a gut feeling.  When you like/love someone or something your reality with it will change. It was an adaptation that was passed down.  It works evolutionarily that if someone in your party fucked you over but you like/loved them and needed their cooperation in the future… It makes sense that you should distort reality for the greater good that is your survival and continue to work with them.  However,   The superfluous feelings you develop for a stock that once made you money though deserves there rightful place in the bowels of memory.

This entry was posted in Market Psychology and tagged , , , , . Bookmark the permalink.