“We have a few simple ideas, ruthlessly executed”
Jeremy Grantham, GMO
There are certain cognitive errors that human beings make with great regularity which cause them to make sub optimal decisions when it comes to investing. Individual humans learn, but collectively human beings tend to repeat those cognitive errors.
Some common ones are:
Herding
Also known as the “bandwagon effect,” herding is the tendency for individuals to mimic the actions of a larger group.
Anchoring Bias
The tendency to rely too heavily on the first piece of information received.
Confirmation Bias
The tendency to ignore information contradictory to prior beliefs.
Disposition Effect
Investors tend to sell winners too early and hold on to losers too long. This occurs because investors like to realize their gains but not their losses, hoping to “make back” what has been lost.
Together, these biases cause investors to either under- or over-react to information, causing pricing inefficiencies and irrational behavior
This creates a “behavior gap” between what investors can achieve and what they actually achieve
We will bridge that gap with our disciplined process driven decision making and execution