Good article, but I prefer a more rigid solution, a second look at the fundamentals of the business.
I’m living exactly through the example you mentioned, stock at 1$ going to 2$ and then back to 1$. I have to say its not easy to endure through, however what kept steady is the actual fundamentals of the business. Through 1$ then 2$ and the back again at 1$, the underlying business doubled its market share, hugely expanded the variety of what it was offering, operational margins are beginning to kick in with scale and new buy back program launched! I told myself I already won, it’s a matter of time for the market to realize how undervalued the stock is. Having bought at a cheap valuation, when the stock price returned to 1$ again, I immediately bought more of the stock at almost double the business fundamentals with the same earlier “cheap” price.
Psychology is very important in investing, but no amount of psychology will have me this confident in a stock (after the drawdown) than truly knowing what business I own. Once u know what u own, rationality has an upper hand against psychological influences.
I think separating the two is a mistake. Doing the work to deeply understand a company and its sector is the best way to reduce uncertainty, which is the main entry point for every cognitive bias (restating your conclusion to set up my own framework).
Doing the hard work is also a prerequisite at every stage of the psychological framework I mentioned:
Pre-mortem → You need to know the company and sector well enough to classify facts as broken thesis vs. noise.
Implementation intention → Same logic, you need that knowledge to define the right if-then rules.
Opportunist limit orders → You have to be confident in your thesis to place them, and more importantly, to hold them.
Only information design is thesis-agnostic, since it operates upstream of the feedback loop.
To summarize: psychology is what turns perceived information into decisions. Redoing the analytical work means feeding better inputs into the machine, but it doesn't guarantee the decision will be right. The psychological machine has to be working properly too. And the tricky part (or the advantage, depending on how you look at it) is that input quality and psychology are interdependent: good inputs tend to produce better psychology, and good psychology tends to seek better inputs.
But I completely agree with your conclusion, which actually seems to contradict your intro, where you specifically separate the two. Or maybe I'm missing something.
The 'patches' framework is an exceptional piece of behavioral design; love it!.
Trying to achieve complete psychological flawlessness in the face of market chaos is a fool's errand, but building targeted operational firewalls to protect ourselves from our own glitches is pure institutional wisdom. Brilliant unpacking of how to actually survive our own human nature!
Thanks, Elizabeth! As usual, you come in with an original angle that makes me think, “I wish I’d thought of that.”
Your “how to actually survive our own human nature” line is excellent, tbh. In a way, it’s one of the core themes of your Substack. Maybe your next series of posts haha!
Thanks! I appreciate the credit, but thank you for the inspiration for a new series; because after all, that’s the whole game: surviving our own natures so we can thrive in our environments.
Good article, but I prefer a more rigid solution, a second look at the fundamentals of the business.
I’m living exactly through the example you mentioned, stock at 1$ going to 2$ and then back to 1$. I have to say its not easy to endure through, however what kept steady is the actual fundamentals of the business. Through 1$ then 2$ and the back again at 1$, the underlying business doubled its market share, hugely expanded the variety of what it was offering, operational margins are beginning to kick in with scale and new buy back program launched! I told myself I already won, it’s a matter of time for the market to realize how undervalued the stock is. Having bought at a cheap valuation, when the stock price returned to 1$ again, I immediately bought more of the stock at almost double the business fundamentals with the same earlier “cheap” price.
Psychology is very important in investing, but no amount of psychology will have me this confident in a stock (after the drawdown) than truly knowing what business I own. Once u know what u own, rationality has an upper hand against psychological influences.
Thanks for the feedback!
I think separating the two is a mistake. Doing the work to deeply understand a company and its sector is the best way to reduce uncertainty, which is the main entry point for every cognitive bias (restating your conclusion to set up my own framework).
Doing the hard work is also a prerequisite at every stage of the psychological framework I mentioned:
Pre-mortem → You need to know the company and sector well enough to classify facts as broken thesis vs. noise.
Implementation intention → Same logic, you need that knowledge to define the right if-then rules.
Opportunist limit orders → You have to be confident in your thesis to place them, and more importantly, to hold them.
Only information design is thesis-agnostic, since it operates upstream of the feedback loop.
To summarize: psychology is what turns perceived information into decisions. Redoing the analytical work means feeding better inputs into the machine, but it doesn't guarantee the decision will be right. The psychological machine has to be working properly too. And the tricky part (or the advantage, depending on how you look at it) is that input quality and psychology are interdependent: good inputs tend to produce better psychology, and good psychology tends to seek better inputs.
But I completely agree with your conclusion, which actually seems to contradict your intro, where you specifically separate the two. Or maybe I'm missing something.
This is really helpful. Most of us are painfully aware of our emotional shortcomings but lack tools to address them. Thank you for the article.
Thanks for taking the time to share your feedback. I’m glad it was useful!
The 'patches' framework is an exceptional piece of behavioral design; love it!.
Trying to achieve complete psychological flawlessness in the face of market chaos is a fool's errand, but building targeted operational firewalls to protect ourselves from our own glitches is pure institutional wisdom. Brilliant unpacking of how to actually survive our own human nature!
Thanks, Elizabeth! As usual, you come in with an original angle that makes me think, “I wish I’d thought of that.”
Your “how to actually survive our own human nature” line is excellent, tbh. In a way, it’s one of the core themes of your Substack. Maybe your next series of posts haha!
Thanks! I appreciate the credit, but thank you for the inspiration for a new series; because after all, that’s the whole game: surviving our own natures so we can thrive in our environments.