Make ‘conscious’ investment decisions
The more deliberate the decision you have to make, the less likely that you will act on an impulse.
Picture this. You are settled comfortably on your living room couch, watching a Saturday evening game, munching on a bag of potato chips with a bottle of soda. Your intention is to have only some chips and soda. But you finish it off within a short time. Why did you eat more than you wanted and how can you intervene to moderate your consumption? Importantly, how can you apply this intervention to your investment decisions?
Your decision to do anything is either automatic or conscious. When you are learning to drive a car, changing gears is a conscious process. But once you learn, you can change gears without consciously thinking about it. Similarly, your decision to eat potato chips was a conscious process. But after your first bite, eating the next one becomes easy. And very soon, you are at the bottom of the bag! In other words, your act of emptying the bag of chips was an automatic process.
So, how can you moderate this behaviour? Your intervention should ensure that you take more conscious decisions when you consume unhealthy food. One way to do so is to consume in smaller quantities — you should choose, say, 250 grams instead of 500 grams pack. Remember, you make a conscious decision to eat chips without particular consideration for the quantity. Completing the bag, though, is an automatic process. So, choosing the smaller pack will force you to make two conscious decisions to consume the same 500 grams of chips. And it is likely you will stop with one bag.
Behavioural economists call this decision points — the more deliberate decisions you have to make, the less likely you will act out of impulse. The question is: How can you apply such intervention to your investment decisions?
You may want to create more decision points for those investments that you are tempted to make but are risky for your financial health. On the other hand, you should create fewer decision points for those investments that are important but which you fail to make. The systematic investment plan on mutual funds that you create every month through automatic debits to your bank account requires (technically) only one decision point – choosing the fund, the investment amount and then setting up the automatic debit. That is why the process works well.
But what if you feel the urge to invest in a timber plantation? Invest the minimum amount required. You can choose to invest more after reviewing the performance. By creating more decision points, you can reduce the mistake of investing too much in highly risky products.
(The author is the founder of Navera Consulting. )
(This article was published on December 7, 2013)