The Two Big Strategic Mistakes That Investors Make
Research finds a discrepancy between what people plan to do when trading—and what they actually do.
The Two Big Strategic Mistakes That Investors MakePeople tend to think of themselves like a fine merlot—they’ll surely improve with age. But you could be more like a wine that may turn to vinegar. And ironically, acknowledging that possibility could improve how you age.
Recent research in behavioral science has argued for an “end of history illusion,” in which a person knows that she has changed over time, but believes she’s done developing now, says Chicago Booth’s Oleg Urminsky.
“We found instead that there’s a positivity bias,” he says. “People know that in the past they have changed for both the better and the worse, and in the future they expect to change as well. They just think that the changes will be primarily improvements.”
When Urminsky and his Booth co-researchers, Daniel Bartels and PhD candidate Sarah Molouki, asked people what types of changes they predicted for their future selves, most respondents anticipated a lot of positive change coming their way. Then the team tracked people over time and tested how much they actually changed by measuring a few personality traits and values. “People think that the ways they’ll change in the future will be mostly positive,” says Urminsky. “They think, ‘I’m only going to get better!’ When we followed up a year later, people had changed a lot more than they expected, mainly because of negative changes they hadn’t predicted.”
The way we expect to change can have important consequences for the choices we make now. Urminsky and Booth PhD candidate Adelle X. Yang looked into whether people’s current level of optimism and pessimism was linked to their interest in trying new things, such as movies and music. When people felt optimistic about what previous events implied for a future outcome, they were less likely to want to make a change and test out new genres. On the flip side, when people’s outlooks were less positive, they were more likely to want to explore new types of entertainment.
The same may go for other areas of life. “If you’re exercising and it’s not working, you may want to change programs,” says Urminsky. And if you’re feeling generally discontented and pessimistic about the person you think you’ll become, you’re more likely to act today to change that future self. Adds Urminsky, “It’s important to recognize that the way we think about the future self is to some degree under our control.”
Research finds a discrepancy between what people plan to do when trading—and what they actually do.
The Two Big Strategic Mistakes That Investors MakePeople often neglect to consider the diminishing nature of marginal utility in everyday financial decisions unless prompted to do so—and it makes a big difference.
Would You Take a Later Flight for Cash?A self-imposed barrier is preventing people from connecting.
The Person Stopping You from Being Happier Is Probably YouYour Privacy
We want to demonstrate our commitment to your privacy. Please review Chicago Booth's privacy notice, which provides information explaining how and why we collect particular information when you visit our website.