Critical Thinking for Investors
The ability to think clearly and draw correct conclusions is necessary in everyday life, especially when it comes to making important decisions. But thinking critically is not natural; it’s not the way our brains are hardwired. Instead, we are hardwired to follow the path of least resistance, which often results in hasty and suboptimal decisions. This is especially prevalent when uncertainty, anxiety, and emotions are high.
Assumptions: Necessary, But Unreliable
Because we seldom have full information, we must rely on assumptions to fill in the information gaps. These necessary, but often spurious assumptions can cause flaws in our thinking and judgement. If information seems plausible, especially if it is part of a good “story”, our brains will accept it as fact and move on.
As investors, we may assume that an “expert”, who has a lot of experience and is a frequent contributor on financial shows, knows what will happen and have our best interests at heart. We also unconsciously (and falsely) attribute one’s confidence with one’s ability to correctly divine the future. As much as we wish it were true, it’s not.
Even when we have full information, we still don’t know how others will respond – such as with the global shut down. Who would have thought the market would tread higher even as countries and economies shut down?
Critical Thinking is Critical for Investors
We are not born to be critical thinkers, just like we aren’t born to be great musicians. It takes effort, time, and practice. Critical thinking requires us to:
Seek all available information - not just the information at your fingertips
Play devil’s advocate – what if the opposite is true
Challenge pre-existing opinions/conclusions
Cognitively, critical thinking is hard; it is draining. Which is why our thinking often defaults to the path of least resistance. Thinking critically about the economy, markets, and your options are essential to making wise decisions. It may not be natural nor easy to think critically, but together we can ensure your financial decisions are thoughtful and in line with your plan.
©2022 The Behavioral Finance Network