SMART INVESTOR: Ask Yourself These 3 Questions Before You Make A New Investment

Photo: The behaviour Gap

In his book, “The behaviour Gap,” financial planner and blogger Carl Richards makes no bones about the damage overconfidence can cause even the most experienced investors.

“It would be nice if only Nobel Prize winners and Federal Reserve Board chairmen were prone to overconfidence –– but reams of research show that the rest of us have a similar problem,” he writes.

A team of Goethe University Frankfurt researchers recently put overconfidence to the test in their report, “Do Individual Investors Learn From Their Mistakes?“. 

They found that investors do make wiser decisions with experience, but only on one condition: If they have learned from mistakes caused by overconfidence in the past.

Richards makes a similar point: “We can recognise that we’re not as smart as we think we are. In fact, the smartest investors are the ones who acknowledge that they aren’t smart enough to forecast events or pick the best stock or avoid every scam.”

Here’s the three-prong conversation Richards makes all of his clients have before making a big investment decision:

  • If I make this change and I am right, what impact will it have on my life?
  • What impact will it have if I’m wrong?
  • Have I been wrong before?

Chances are you’ll have a clearer view of your path once you’ve answered these truthfully.

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