In this interview with Outlook Business, Michael Mauboussin discusses the three big behavioral mistakes that investors make. Here’s an excerpt from the interview:
Mauboussin: Investors make a lot of behavioral mistakes but I’ll mention three I think are particularly prominent.
The first is this notion of being overconfident. People tend to be overconfident in understanding the future and the way that manifests for investors is they tend to project ranges of outcomes that are vastly too narrow. So investors really need to try to calibrate themselves to appropriate distributions of outcomes to offset that overconfidence.
The second really big one is called confirmation bias that basically says once you’ve made up your mind, made an investment, you can to seek information that confirms your point of view and dismiss or disavow information that doesn’t confirm it. One of the essential tasks of an investor is really to understand new information as it comes in and to revise your views appropriately.
The third big one is a failure to use base rates. So base rates are essentially a record of what’s happened in the past to companies in similar situations. An understanding of base rates in terms of sales growth rates or earnings growth rates or return on capital patterns can allow investors to have a much better understanding about how the future may unfold for a particular company or an industry.
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