The cognitive bias everyone wants you to keep

Posted on

Few mental biases will cut into your returns like commitment and consistency. 

There are dozens of cognitive biases that can affect your decision-making and lead you to buy or sell stocks at exactly the wrong time: confirmation bias, social referencing, anchoring and the bandwagon effect to name just a few. Each requires its own set of preparations, as we explain in The most common investor biases and their solutions.

Yesterday, though, I was given a jarring reminder of another bias that creeps in – only this one is especially hard to shake because everyone around you is rooting for its success. In some ways, society is built on it.

Long story short, we switched our recommendation on Monash IVF (ASX: MVF) from Buy to Sell following the chief executive’s resignation 10 months into his post. 

This isn’t about Monash or the reasons for our decision, which you can find here. What caught my attention was the reaction of some of our members who were disappointed – horrified, even – that we might flip so quickly from Buy to Sell, overturning a Buy recommendation published only a few weeks ago.

Flip-flopping is certainly annoying and studies have shown that too much trading leads to below-average returns. The curious part, though, is that sudden recommendation changes actually run against a mental bias working hard to keep our recommendations steady: the Commitment and Consistency Principle

Leave a Reply

Your email address will not be published. Required fields are marked *