“To understand error in judgment, we must understand both bias & noise. In real-word decisions, the amount of noise is scandalously high. However, bias is the star of the show and noise is a bit player, usually offstage.”
From the book Noise – a flaw in human judgment, authored by Daniel Kahneman, Oliver Sibony, & Cass Sunstein, where they put up the case that the topic of bias has been discussed in thousands of scientific articles and popular books. This book was their attempt to redress the balance.
This can’t be more-true as far as the investment world is concerned. There are several studies on the role of bias, whereas noise gets mentioned in the passing. This is our attempt to give a structure to the role of noise, hence we are calling it as “the noise system”. As nothing subverts rational thinking & behavior more than being bombarded by noise.
The noise-system has many contributors to it, primarily being:
- Media – the phenomenon of breaking news is well known. Besides, the vocabulary used by many financial dailies is also quite tantalizing – pick up a newspaper and see how they describe day-to-day market movements.
- The Investment community – the incentive structure of a large section of the community is such that their livelihoods depend on your making a purchase through them. And the focus is to get you to buy, one way or the other. Another big contributor has been the role of upfront income in their revenues. While the regulator has taken steps to abolish it, the after-effects will be felt for a few years.
- Friends & peers – there are folks around you who love to talk about their successes and how smartly they have managed to beat the markets.
This noise-system feeds on your vulnerabilities and leads to hasty decisions.
How to beat the noise system ?
- Be aware of the same and recognise the incentive structures behind it.
- Also, remember that investment is only a means you use to achieve an end, the end being your financial wellness.
- Over time, develop the right muscles to deflect the noise.
There is one more way – get Serenity on your side 😊
