Get Your Head Out of the Cave

Jim may not be beyond all hope. Neither are you. We suffer these behaviors, to be sure, but we aren’t doomed. The way to overcome Stone Age thinking is regular and rigorous application of Question Three. After you’ve asked if what you believe is correct, and after you ask what you can fathom that others can’t, it’s imperative you pull your head out of the cave and ask whether your brain is sending you bad messages.

There are some practical things you can begin doing, right now, to help combat the more common cognitive errors. Once you learn to repeatedly ask Question Three and are suspicious you’re on the brink of making a cognitive error, you can apply some of the following practices to keep yourself on this side of the millennium.

Another Flip—Accumulate Regret, Shun Pride

The Bible tells us pride goes before a fall. In capital markets, pride goes before myopic loss aversion as well as overconfidence, hindsight bias and just about everything else that is evil, including selling at the bottom. You must reverse your natural inclinations permanently. You must shun pride and accumulate regret. It’s the simplest, most basic trick I know to becoming a better investor.

If you have a stock up a lot, assume you aren’t a genius. Assume you’re lucky, and luck can run out. If you have a stock down a lot, don’t run from your regret. Accumulate regret with every loss. Live with it. Love it. Assume you weren’t victimized by Enron management, greedy bankers, your ...

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