One of the most remarkable developments of the past decade in the world of investing has been the rise of smart machines. At the very top of this trend is our favourite smart machine – The Smartphone.
Almost everything in life is now just a tap (or app) away. However, along with this convenience also comes the real possibility of these smartphones making us do dumb things. That too without us realising it.
Smartphones and Us
Smart phones have literally put everything you need to manage investments in your hands – The bank, the media (both the official and the social type), investment products and your stock broker.
In fact, these smart phones have become so integrated into our lives that for a large number of people their mobile phone is the last thing they see before going to bed and the first thing upon waking up.
While these machines and the technology powering them have been improving rapidly over the recent years, there is something else though that has not changed at all during this time:
The human mind and how it interacts with the environment around it.
Our mind still works and responds based on the same animal instincts of our ancestors that have evolved over thousands of years
As a result, this close interaction of smartphones and the human mind has all the makings of a dangerous situation for your financial wellbeing.
A lethal combination that strikes at the root of one of the most important rules of investment:
Investments work best if held for the long term
Lets us take a look how this interaction between the smart phones and our mind takes place.
Unlike smartphones that can do many things at the same time, the parallel processing power of the human mind is rather limited.
If your mind is occupied with an activity that requires some mental analysis, it is unlikely you can take up any other mentally demanding task at the same time.
To validate this theory you can try talking to your boyfriend (or spouse) when he is busy watching a gripping sports event on TV. Ask him to repeat what you just said to him and see the fun.
(Bonus Tip: If you happen to be the boyfriend (or spouse) being subjected to this TV test, just show your girlfriend or wife this theory – It is not your fault that you can’t hear a word of what she says. It is all the fault of our ancestors. Good Luck!)
Smartphones are amazing machines that flood us with so much information at any given moment that it becomes physically impossible for a person to make sense of it all. There is no time for any careful analysis.
Although studies have time and again showed the value of thinking about investments with a long term view, however the information overload of the present moment does not allow us to think long term.
The use of smartphones has drastically reduced our attention spans.
(The very fact that you have managed to reach this stage of the article shows that you are already doing much better than most people in terms of coping with distractions)
A tweet from a market expert or a Facebook comment from a friend during a market meltdown can quickly distract us from the long term thinking. As a result we are primed to make mistakes based on the limited nuggets of information that we can process during the heat of the moment.
Smartphones allow us to track the condition of our investment portfolio on a real time basis. You can see how your investments are doing on a second by second basis, tick by tick.
Research has shown that the parts of our brain which gets activated when experiencing a threat or risk of loss are the same ones associated with anxiety and fear. In addition, the human instinct to avoid a loss is about twice as powerful as the instinct that pushes us towards a gain.
Our brain prioritises bad news over good news by default (Yes, it’s our ancestors again).
Now imagine the scenario when the next bear market kicks in.
As you take a glance at your smartphone and see your specific investment or the broader market going down, your start experiencing this mental pain right in front of your eyes. Every refresh of your smartphone browser delivers an even greater intensity of this pain in quick succession.
Even though you may not realise it your body too starts reacting to this threat of a loss – Your heartbeat goes up along with your blood pressure and your palms start to get sweaty.
The coping mechanism of your brain will immediately start pushing you to act to avoid this threat.
(Brain Talk – “Don’t just sit there goddammit. Do Something”)
Urgency to Act
A deer that does not act once a threat to its wellbeing has been identified is doomed to be eaten by the lion. Nature has programmed all animals including humans with this survival instinct.
In the same way, our brains are also primed to act and do something as soon as the threat of a financial loss has been identified on our smartphone screen. It is counter intuitive and takes a lot of will power to “do nothing” in the face of this potential loss that is staring at you.
There is a very high temptation to sell your investments right now to limit your losses. Your mind is pushing you towards cutting your losses.
You eventually fall for the temptation and SELL. Our survival instinct has caused us to make a short term decision to the detriment of our long term financial wellbeing.
There is a chance that by now you might be wondering if successful investing requires giving up your smart phone.
So, here is the good news:
NO. You don’t have to give up your beloved smartphone, but there are couple of simple things you could consider doing to prevent yourself from hurting your own long term financial well-being.
Let me stress this point again – They sound really simple but are really hard to do and will require a conscious effort.
Ok, here we go:
Trick Your Mind
Now that you know about the tricks that your mind plays on you, you can try to play the same trick in reverse. You can do this by changing the incoming signals for your mind to interpret.
Here is one way to do it:
In most countries around the world the colour RED is associated with danger. A RED colour associated with a stock price or an accounting statement signals instant trouble to the mind.
Here is a fun fact – The stock market display boards in China show stock prices in GREEN colour when prices are DOWN and in RED colour when they are UP. This is because the colour RED is normally associated with prosperity and good luck in China.
So what if you too could use the Chinese Model on your smartphone?
What if you could trick your eyes into taking some extra time to actually see the stock price before sending the danger signal to your brain?
The idea in itself seems completely irrational. How can just a simple change in colour make any difference to our brain?
However, as we have seen we don’t always act rationally even when we know the right thing to do. Our mind already thinks about stuff we are seeing, even before we consciously start the process of thinking.
If your current trading app does not given you the option to make this colour switch, then send your broker a message with this colour coding request. It seems like an easy thing to do.
(Also if you happen to know of any investment app developers, do share this idea with them. It might ultimately help you as well as others.)
Make it Difficult to Act on Impulse
You can take the nuclear option and delete the app that allows you to track or trade investments from your smartphone. (As you can imagine this suggestion will make me very popular with companies who get their revenue by making you trade online on your smartphones).
However, if you feel the need to constantly monitor your portfolio multiple times a day, then switch your trading app to a “view only mode”. In other words, remove the ability to buy or sell investments using your smartphone.
The extra effort that you will now need to execute any transaction via your financial advisor or some other slower method will give you a few extra minutes or hours.
These crucial extra minutes will help you think through a bit more about your intended decision.
Given the constant information flow on your smartphone, you may even see or read something that makes you change your mind before selling.
And in the rare instance that you do take your eyes off that smartphone, you may even get the opportunity to meet and talk to another human being to exchange views. Someone who may just happen to be in a more rational frame of mind at that point in time and could help you to counter your short term irrationality.
It has been a decade since we saw the last proper bear market. In 2008, the role of smartphones in our lives was much less compared to today.
Smartphones and social media channels have jumped by leaps and bounds since that time. We have all heard stories about the role that smart machines and social media have been playing in influencing election outcomes around the world.
The next bear market too will be amplified manifold by smartphones and social media. Your smartphone will push you to do things even without you realising it.
Sometimes smart machines can make us do dumb things.