The Little Book of Behavioral Investing: How not to be your own worst enemy

Chapter Three

Always Look on the Bright Side of Life

“But, Why Should I Own This Investment?”

 

 

 

 

 

 

LET ME ASK YOU THREE QUESTIONS. Don’t worry, they aren’t as tricky as those we encountered in the Introduction.

1. Are you above average when you drive a car?

2. Are you above average at your job?

3. Are you above average when you make love?

If you are like the vast majority of people you will have answered each of these three questions in the affirmative. Indeed, when I ask for a show of hands there is usually one gentleman who raises both hands in response to question 3 (I’ m personally convinced this is extreme overconfidence, but we will leave that for the next chapter).

Optimism seems ingrained in the human psyche. At the end of Monty Python’s Life of Brian, those hanging on crucifixes begin singing “Always look on the bright side of life.” It would appear that the vast majority of people subscribe to this particular view of the world.

When I asked a sample of more than 600 professional fund managers how many of them were above average at their jobs, an impressive 74 percent responded in the affirmative. Indeed, many of them wrote comments such as, “I know everyone thinks they are, but I really am!” Similarly, some 70 percent of analysts think they are better than their peers at forecasting earnings—yet, the very same analysts had 91 percent of their recommendations as either buys or holds in February 2008. This trait is not unique to the investment industry. When teaching, I ...