The First Lesson: A Painful Observation
During my early days of investing I witnessed a respected investor I admired make a blindingly obvious mistake. The experienced investor refused to see the accumulating signs while strengthening his losing bet and created elaborate justifications through his experienced perspective. I remained silent at that moment. I was just starting my journey while still learning and I didn't want to interrupt. But I never forgot it.
The loss itself did not impact me as much. Losses in the market are a universal thing; we all go through them. His complete lack of awareness about his own prejudice was what struck me the most. Intelligence failed to provide protection from irrational decisions and often resulted in more severe irrational behavior.
Intelligence Is Not Immunity
People generally believe that intellectual abilities, such as those measured through degrees and test scores or quick wit, provide protection against bad choices. When looking back at history and beyond we can see this story play out.
One of the most outstanding minds throughout human history belonged to Isaac Newton. When South Sea Company stock was caught up in speculative madness, it attracted Newton to make an investment in 1720. This market opportunity allowed Newton to earn money from the South Sea Company before he wisely exited his position and made a fortune. He returned to the market after observing others achieve greater gains by paying a higher price. The market collapsed when he re-entered, and this led to substantial financial loss.
In one of Newton's most famous quotes, Newton expressed his inability to comprehend human mental behavior despite his ability to calculate celestial motions:" I can calculate the motion of heavenly bodies, but not the madness of men." Newton failed to grasp how people behave under crowd influence despite his mastery of mathematics.
Why Smart People Fall for Bad Decisions
The main issue arises from excessive confidence among investors. People with high intelligence possess strong abilities to defend their incorrect beliefs despite evidence against them. Smart investors possess advanced skills to manipulate evidence while selecting beneficial data while producing logical arguments to justify their conclusions.
This is particularly dangerous in investing. Highly intelligent investors often develop beliefs that value can be found in what others perceive as risk, while market anxiety represents investment possibilities rather than signs of danger. Sometimes they're right. The consequences of their incorrect decisions become severe when their predictions fail.
People with confirmation bias tend to seek evidence that supports their existing beliefs. Smart people are great at this. People with strong logical skills can construct bulletproof logical frameworks that disguise their emotional decisions.
And then there's loss aversion. Someone who demonstrates intellectual pride faces greater challenges when admitting their mistakes. Instead of adjusting their approach, they double down. The investor interprets market-induced temporary losses as market misjudgments instead of recognizing their own flawed thinking.
The Seduction of Narratives
We tend to develop strong emotional connections with financial stories that involve technological advancements and industrial developments and charismatic business leaders. These stories aren't always false. In fact, some of them are true. The practice of investing through stories rather than risk management and numerical analysis poses serious risks to investors.
Brilliant engineers regularly put their financial capital into companies that they comprehend from a technical standpoint although they fail to correctly analyze their financial aspects. Economists who excel at modeling complex economic systems became victims of basic pump-and-dump schemes because the timing appeared appropriate. Stories possess enough power to influence people who recognize the truth about them.
The Wisdom of Humility
What's the antidote to this kind of irrationality? It isn't more intelligence. It's humility.
The practice of humility enables people to recognize their lack of complete understanding. This mindset leads you to spread your investments and take profits as they appear and to withdraw from losing positions before they continue descending. The practice enables you to reevaluate your initial beliefs while accepting new evidence that opposes your previous findings.
During the years I have established several habits which maintain my level of composure:
I document all the investment reasons before making my decisions.
I need to establish beforehand the criteria which will determine investment success as well as failure.
I perform periodic assessments of my decisions to determine if I maintain objectivity or maintain my initial stance.I actively listen to everyone who disagrees with my opinions.
Learning from History — and Ourselves
The process of investing challenges us to prove our knowledge but also puts our character to the test at the same time. Having high intelligence does not protect you from managing your emotional responses.
Each successive group of people develops its own form of irrational market enthusiasm which manifests as dot-coms, real estate, crypto and AI startups. Intelligent individuals regularly enter markets at the wrong time or remain too long because their pride prevents them from becoming early adopters. Our market understanding from intelligence protects us from human behavioral weaknesses.
We all have our blind spots. The main objective is to detect our blind spots at an early stage because effective management becomes essential at this point. That's where wisdom begins.
All intelligent individuals exhibit irrational behavior at some point. In fact, it's inevitable. Recognizing this basic truth represents the most intelligent decision you can make.
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