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When it comes to investing, there are two groups of individuals. They make a lot of money by manipulating market irrationalities and finding great companies, including Warren Buffet. They have a natural talent for it. Then some have day jobs but want to save our money to see it grow faster. There’s a third group of people like us between these two types but think they’re Warren Buffet.
When it comes to saving, why can robots do a better job than we can? The main explanation is that we “think” and therefore are influenced by many of our behavioural prejudices when making decisions.
1. We are overconfident
According to different polls, more than two-thirds of people assume they are better than average drivers, attorneys, physicians, or whatever occupation they are in. This isn’t the case. Similarly, we assume we are superior to the average investor. The guy selling you (or buying from you) is probably thinking the same thing. Not only that, but we also exaggerate our willingness to take chances. Investors hope that by taking more chances, they would be able to withstand market conditions.
2. We have a strong aversion to loss
Do you realise that the level of unhappiness we experience due to a 20% loss is much greater than the happiness we experience as a result of a 20% gain? We find it very difficult to persevere in the face of setbacks. What is it about fixed deposits that make them so popular? Since you don’t anticipate a negative balance. You can believe that you can easily live with a temporary 20% loss – please refer to point 1. We don’t even know who we are.
3. We procrastinate
Do you have any idea when people start saving for taxes? When the HR guys ask for tax proofs at the last minute. We have a clear preference for priority over urgency. Saving money isn’t urgent, and it doesn’t have immediate gratification. We put it off until later, which never comes. SIPs have become very common in recent years because investors do not have to take any action. If you try to do a SIP by hand for a year, you will miss most of them.
4. We cannot foresee a longer duration
We grossly underestimate the worth of money in terms of time. We understand compound interest, but it’s difficult to visualise its effect over some time, such as 25 years. Similarly, though we understand inflation, estimating how much a loaf of bread will cost us in 25 years is challenging. You can do the mental math now to figure it out, but the point is that we don’t do it when making critical financial decisions.
5. We cannot do mental accounting
Buying and selling investment goods necessitates a great deal of math. You must account for transaction costs, tax accounting, and product valuation, among other things. And the most creative minds can’t account for all of the variables.
Calculations are what machines are designed to do.