Behavioural Biases in Investing
19 April 2015
Our brain’s threat centre always gives priority to bad news – it feeds directly into the amygdala, which processes emotions. Why is this so? By shaving a few hundredths of a second from the time needed to detect a predator, the circuit improves the animal’s (in this case – humans) odds of living long enough to reproduce.
We are hard-wired to respond quickly to threats, even if they are only symbolic in nature:
WAR, CRIME, COLLAPSE, DISASTER, PANIC, HORROR, DEATH
all evoke feelings and attract attention faster than:
PEACE, LOVE, HAPPINESS, STABILITY, SERENITY.
Consider this: an entire bowl of goodness (cherries in this case) will completely be ruined by a single cockroach.
But an entire bowl of horror will remain horrible even if you put a single piece of goodness in it.
To our human minds, bad is stronger than good. This explains human nature to loss aversion – we are driven more strongly to avoid losses in investments (because of the negativity), than to achieve gains.
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