You don’t have to know everything to invest well
But you do have to know how to use the information you have.
Sometimes, people seem to make investment decisions in perplexing ways. You may have heard, at some point, someone proudly touting an investment they made because a buddy/an influencer/their star chart said it was a good idea.
Such behavior can make our inner critic scoff, “How could they make that decision with so little research? Don’t they know they should get all the information before investing?”
But the fact is that we’ve all made investment decisions (and decisions in life) without complete information. Because we have to.
It’s impossible to know every cost and benefit associated with every decision. For example, if you decide to invest in a single stock, you may have done research on the company you are interested in investing in. You may have even done research on similar companies to determine which is the better investment. But you certainly haven’t done research on every single investing opportunity that you foreclose by investing in one stock. That’s what it would really mean to have all the information.
And with the complexity of the investing world today, it is also effectively impossible.
It’s not about knowing everything, but knowing better
It’s typically a great thing that our brain is wired to help us make decisions with incomplete data. Imagine if you could only have lunch after weighing the decision for every possible thing you could eat or buy a new outfit after trying on every single option from every store—you’d never get through the day.
But shortcuts don’t serve us well when it comes to making complex decisions on matters like investing. In these situations, the shortcuts become cognitive biases. This is because our brains don’t treat all information equally, and it isn’t as simple as, “The best information takes up the most space in our brain.”
Instead, we are prone to placing more weight on information that readily comes to mind (availability bias), regardless of its accuracy. We also tend to seek out and put greater importance on information that speaks to a belief we already have (confirmation bias).
You can see how these shortcuts can lead us astray: They may cause us to overgeneralize top-of-mind events or to ignore important information because it goes against the course of action we already want to take.
Unfortunately, recognizing these cognitive biases isn’t enough to reduce your reliance on them, even for experts. However, you can interrupt the typical thought process when seeking information to help you make better decisions.
3 ways to stop cognitive biases in their tracks
- Slow down. People tend to rely on cognitive biases more when trying to make decisions quickly, since they are a more automated way of thinking. When making an investing decision, commit to not acting on the decision for at least a day. Giving yourself more time to think it over allows your brain to engage in more effortful thought, which can help counteract the effects of cognitive biases.
- Play devil’s advocate. When you have a tentative plan, start by listing the reasons why you think this plan will work well. But don’t stop there: Try to prove yourself wrong. Research various points that indicate your plan won’t work well, and jot them down, too. This will ensure that you are considering contrary evidence and will allow you to compare the two sides more directly.
- Phone a friend. If you’re satisfied your plan stands up against the devil’s advocate position, run it by a third party whom you can trust for honest feedback. (This isn’t the time to talk to any yes-men.) A friend can serve as an outside voice to evaluate whether you’ve made any jumps in logic or placed too much (or too little) weight on different pieces of information. This step can serve as a final sanity check before acting on your plan.
In the end, it’s important to remember that, even though we will have to make investment decisions with incomplete information, we can take steps to ensure the information we do have is being used well.