“The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.” – Howard Marks

Thousands of years ago, when our ancestors lived in caves, survival often depended on swift reactions. The difference between securing food and becoming food could hinge on mere moments. Our brains have evolved to prioritise immediate response to threats. Before we can even rationalise a situation, our brain’s emotional and habitual centres are already on alert. The tiny gap between instinctual reaction and rational thought may only be a few milliseconds, but for our ancient forebears, those crucial moments could mean the difference between life and death.

When it comes to investing, human nature often works against us. Our natural instincts frequently lead us astray, making it difficult to make rational financial decisions. When our investing goes awry, it’s easy to blame ourselves, but in reality, our natural cognitive biases are to blame. We should not judge ourselves harshly – even experienced investors fall prey to instincts that lead to poor financial decisions. Our brains are simply not wired to intuitively grasp the best practices of investing. But the fault lies not in ourselves, but in our human nature. The key is to approach investing with that reality in mind.

Evolution has equipped us effectively for life in the wilderness, but how do we navigate the myriad stimuli in our contemporary world? Imagine watching the evening news, and the first image you see is a trader on the stock exchange floor, a tear tracing its path down his cheek. This visual tugs at your emotions instantly.

A similar emotional jolt occurs when a friend shares an alarming article, or when you check your pension value amidst this year’s market volatility. The innate fight-or-flight response might urge you to exit the market or make significant changes. This issue extends beyond just investment—it influences financial, business, and personal decisions alike. We perceive a threat, and our instinct is to respond.

When starved of context or information, our feelings become the compass. Confronted with unsettling news, you reach out to your adviser. They reassure you, emphasising long-term goals. Yet, without a solid foundation in financial planning, their words might offer little solace.

By understanding our innate tendencies and consciously counteracting them through education, strategy, and discipline, we can override our faulty wiring. With self-compassion, patience, and good financial habits, we can triumph over our instinctive investing pitfalls. When we make poor financial choices, we should remember that it’s not our fault – the fault lies in the limits of human nature. But we have the power to rise above our natural biases if we invest the effort.

Our financial missteps can be traced back to a time when our most pressing concerns were hunting mammoths and avoiding saber-toothed tigers. It’s a puzzling thought, isn’t it? How could our ancient instincts possibly influence our modern investing decisions?

Evolutionary Roots: Our brains evolved to help us survive in environments very different from modern financial markets. For early humans, quick, reactive decisions were often more beneficial than slow, analytical thinking.

Cognitive Load: Our brains have limited processing capacity. Making decisions about investments requires considering vast amounts of complex information. To manage this cognitive load, people often resort to mental shortcuts known as heuristics, even if they are not always logical or rational in the context.

Desire for Control: Humans have an inherent desire to feel in control of their surroundings and outcomes. The stock market, by its nature, is unpredictable. By making active decisions (even if they’re not necessarily rational), people feel a sense of control over their investments.

Difficulty in Grasping Abstract Concepts: The idea of money and abstract financial instruments is, in the grand scheme of human history, relatively new. Concepts like compound interest, market fluctuations, financial risk, and volatility are not inherently intuitive. Many people struggle to fully grasp these concepts, leading to decisions that may seem irrational.

Temporal Discounting: Humans have a natural tendency to prioritise immediate rewards over future benefits. This psychological principle, known as temporal (or time) discounting, means that we might opt for a smaller payoff now over a larger payoff later. In the context of investing, it can lead to decisions that prioritise short-term gains over long-term growth.

Sense of identity and ego: People often tie their financial decisions to their self-worth and identity. Admitting to a bad investment decision or acknowledging a lack of understanding can be a blow to one’s ego, leading them to double down on bad decisions or avoid seeking advice.

Cultural and societal factors: Cultural narratives and societal pressures can shape our understanding of success, wealth, and risk. In some cultures, or communities, for instance, not participating in a booming market might be seen as missing out or being overly cautious.

Misunderstanding of randomness: Humans look for patterns; it’s a fundamental way our brains make sense of the world. However, many events in the stock market are random or influenced by unpredictable factors. People may misinterpret these events as patterns or indicators, leading to irrational decisions.

Overwhelm and Information Overload: With the internet and 24/7 news cycles, investors are bombarded with information, opinions, and predictions. Sifting through this to determine what’s relevant and accurate is challenging and can lead to decision fatigue or reliance on questionable sources. This can lead onto: Buyer’s paralysis.

“Buyer’s paralysis” refers to the difficulty some investors have in pulling the trigger to make purchases due to analysis paralysis or fear of making the wrong decision. It stems from the endless amount of data and options in the financial markets, which can make choosing what to invest in and when, paralysingly complex.

Some key traits of buyer’s paralysis include:

• Endlessly researching and analysing investment options without ever buying them.
• Constantly looking for new information to make absolutely sure it’s the right pick.
• Delaying decisions again and again out of fear of making a mistake.

• Finding reasons to doubt every potential investment, preventing any action.
• Letting great opportunities pass by while locked in indecision which leads to regret. 

At their core, many of these factors are deeply rooted in our evolutionary history, cognitive limits, and the fundamental ways in which humans perceive and process information. Recognising these fundamental challenges is the first step in navigating them effectively.