In the world of purely efficient markets, economic actors behave in their own rational self interest by dispassionately weighing the evidence and making optimal decisions on investment matters. In the real world, emotions are often an investor’s worst enemy and typically lead to decisions that are suboptimal at best. One of the benefits of developing the “latticework of mental models” advocated by Charlie Munger and others is that we can begin to build defenses against human tendencies that lead to poor results. Read this article for more details.
Jason Zweig, author of the Wall Street Journal’s Intelligent Investor column, wrote an interesting article regarding confirmation bias for today’s paper. Confirmation bias refers to the tendency of individuals to seek out information that confirms preconceived opinions or ideas. This tendency can exist in all aspects of life but is particularly dangerous when it impacts investment decisions. Read this article for more information and to view a video on confirmation bias.