The Psychology of Investing #16: The Silent Killer of Rational Investing – Safal Niveshak

One goal. A better life.

“This is a masterpiece.”

—Morgan Housel, author, Psychology of Money

“Discover the extraordinary within yourself.”

—Manish Chokhani, Director, Enam Possess

The Internet is full of sources claiming that “almost everything you thought about investing is wrong.” However, far fewer are willing to help you become a better investor by revealing that “much of what you think you know about yourself is wrong.” In this series of posts on the psychology of investing, I will take you on the journey of the biggest psychological flaws that plague us and cause us to make stupid mistakes when investing. This series is part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund.

We make tens of thousands of decisions, from what we wear and what we eat to which stocks we buy. Many are trivial, but each requires a small amount of mental energy.

Psychologists have a name for this: decision fatigue. There is a tendency for our decision making to be distorted as a result of having made multiple decisions recently.

Mark Zuckerberg once said that he wears the same gray T-shirt every day because it feels “frivolous” to decide what to wear. Steve Jobs famously did the same with his black turtleneck. Wearing only gray or blue suits, Barack Obama explained, “I try to limit decisions. I don’t want to waste time deciding what to eat or wear because I have too many other decisions to make.” I learned from these guys that most of the T-shirts I have in my wardrobe are three colors: black, light black, and dark black.

Although your partner may grin when you wear almost the same “uniform” every day, there is an important truth behind this “lazy” habit: every decision you make depletes your limited cognitive battery. And once the battery runs out, it not only makes you tired, but sometimes reckless.

Social psychologist Roy Baumeister, a pioneer in willpower research, put it bluntly:

Good decision-making is not a trait of the person; it is a state that fluctuates.

He discovered that the more decisions we make, the less disciplined we become. Dieters eat more junk food late in the day. Judges are much more likely to grant parole in the morning than in the afternoon. Doctors prescribe unnecessary antibiotics as the day progresses. The pattern is consistent: mental exhaustion leads to poor judgment.

The paradox of modern choice

In his book The paradox of choiceBarry Schwartz explains how more options can paralyze us. The modern investor lives with this paradox every day, with thousands of mutual funds, IPOs, YouTube ‘stock tips’ and notifications begging for attention. Every piece of information requires a micro-decision: Should I buy this? Should I read that? Should I act now or wait?

The human mind is not designed for this level of choice. Any consideration burns glucose and willpower. Ultimately, even the most rational investor becomes an impulsive investor.

You’ve probably noticed that you can calmly assess the intrinsic value of a company at the start of the day. By evening, you’ll be tempted by the latest “momentum stocks” someone mentioned on Twitter. It is not a lack of intelligence, but simply decision fatigue in disguise.

If you study history’s best investors, you’ll find that most of them have recognized the danger of mental clutter. Warren Buffett once said that he would give students a punch card with 20 slots for their lifetime investments, and once the slots were used, no more investments would be allowed:

I could improve your ultimate financial well-being by giving you a card with only twenty squares in it, so you got twenty smacks—which amounts to all the investments you have to make in your life. And once you had swiped the card, you could no longer make any investments at all. Under those rules, you would think very carefully about what you were doing, and you would be forced to talk about what you had really been thinking about. So you would do so much better.

He wrote this in his 1993 letter to shareholders:

Charlie and I decided long ago that it’s just too hard to make hundreds of smart decisions in an investing lifetime. That assessment became increasingly compelling as Berkshire’s capital mushroomed and the universe of investments that could significantly influence our results shrank dramatically. So only a few times have we adopted a strategy that required us to be smart – and not too smart. In fact, we now settle for one good idea per year. (Charlie says it’s my turn.)

Munger added:

It is clear to me that the winner must bet very selectively. It became clear to me very early in my life. I don’t know why it’s not clear to a lot of other people.

These are not just statements about focus, but, more importantly, about conserving cognitive energy. Munger and Buffett knew that the more often you are forced to make decisions, the lower the quality of those decisions. So they removed unnecessary noise and waited patiently for the rare, obvious pitch.

Baumeister, who I quoted above, did research showing how willpower works like a prepaid card with limited validity and limited use. The more you resist temptation or make difficult choices, the less power you have for the next decision.

That’s why investors who spend hours scanning the market often make their worst decisions late in the day, which may include selling too quickly, chasing a stock that “everyone” seems to be buying, or overreacting to small news.

Decision fatigue also explains the illusion of productivity that many investors fall into when they make a mistake activity for insight. The more tired you are, the more you confuse movement with progress. That’s when “just one more transaction” makes sense.

How to protect your decision-making energy

Now, you can’t avoid making decisions, but you can protect your willpower from wasted decisions. The solution is not to think harder, but to think less and better.

Here are a few practical ways that have helped me maintain my decision-making energy and make better decisions over the years:

1. Automate the trivial: Eat about the same breakfast, wear simple clothes and plan workouts. Just free your mind from low-stakes choices. The mental energy saved here ends up elsewhere.
2. Collect your investment decisions: Don’t check your portfolio every day. Maybe review it monthly or quarterly all at once. Frequent checking leads to micro-decisions that exhaust you and lead you toward short-term noise.
3. Preload the important: Do your deep analysis and important portfolio reviews in the morning, when your mental reserves are full. Avoid evaluating new investments late at night. Also applies to writing. Write down your most important ideas in the morning.
4. Use predetermined rules: Establish written principles on when to buy, when to sell, position sizes and margins of safety. Situation-dependent exceptions are always possible, but such written principles help transform emotional judgments into automatic triggers, preserving decision energy.
5. Limit your “menu”: Just because there are thousands of publicly traded companies doesn’t mean you have to study them all. Determine your circle of competence, which will help keep fatigue (and foolishness) at bay.
6. Rest and refuel: Sleep well (good investing also helps there). It’s a reset button for your willpower. No amount of caffeine or investment gains can replace this.

Guy Spier once wrote that his returns might be no worse, and perhaps even better, if he could trade just once a year:

I actually think it’s entirely possible that my returns wouldn’t be much worse and might even be better if I were only allowed to trade one day a year, so every January 1 or the first week of January, make all my trades and then do nothing for another year and just let those decisions grow.

Think of fund managers who sit in front of 10 screens all day. Their work requires hundreds of micro-decisions. And when the market is close, they are empty. That’s when impulsive trades happen at the end of the day.

We as investors are not immune either. Checking your portfolio five times a day creates five unnecessary decisions:Should I do something? Should I sell now? Should I buy more? Ultimately, fatigue disguises itself as intuition.

The wisdom of doing less

Bruce Lee once said:

It is not a daily increase, but a daily decrease, chopping away the unimportant.

That one line could serve as a philosophy for both living and investing. After all, investing is not an IQ competition. It is an endurance test of judgment and self-control. The longer you stay in the game, the more you realize that your greatest advantage is not superior intelligence, but persistent clarity, which fades most quickly if you use it too much.

Sometimes that also means that you don’t have to decide alone. When fatigue clouds your thinking, it helps to have a trusted friend, mentor, or financial advisor who challenges your impulses and holds a mirror up to you. A good counselor may not make the decision for you, but it can keep you from making a decision you will regret.

So wait a moment before clicking the next ‘Buy’ button. Ask yourself: Do I act because it is right, or because I am tired of deciding?

You may find some insightful answers there, and they may just save you from making a costly mistake.

Disclaimer: This article was published as part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund. All mutual fund investors must go through a one-time KYC (Know Your Customer) process. Investors may only deal with registered investment funds (“RMF”). For more information on KYC, RMF and the procedure for filing/redressal of any complaints, please visit dspim.com/IEID. Investments in mutual funds are subject to market risks; read all fund-related documents carefully.

Two books. One goal. A better life.

“This is a masterpiece.”

—Morgan Housel, author, Psychology of Money

“Discover the extraordinary within yourself.”

—Manish Chokhani, Director, Enam Possess