[[Start here]] → Mindset --- ![[manage the monkey mind.png]] If you are going to be [[self reliance is the path to investment success|self reliant]] and manage your own investments, you’ll have to face up to your biggest problem - your monkey mind. Daniel Kahneman, in Thinking Fast and Slow[^1], described the mind as having two systems. Not one for poetry, he called them System 1 and System 2. System 1 is the fast, emotional and often unconscious decision system (which we’ll call the *Monkey*), while System 2 is the slow, rational and conscious mind (which we’ll call the *King*). While we may like to believe our King is in charge, he’s lazy and defers to the Monkey for most day to day matters. The Monkey is impulsive, gets caught up in groups, is prone to fantasy, and generally shows a range of short-term, often self-defeating behaviours that impair the King’s wealth. The good news is the Monkey can be trained. If you have any intention on running your own money it’s not enough to set out with a financial goal. You have to dedicate yourself to managing your Monkey. Individual investors, being less experienced, often have highly untrained Monkeys looking after their money. A couple of academics, Barber & Odean[^2], rounded up all the studies they could of individual investor trading habits and came to some startling observations. As individual investors… 1. we’re prone to “perverse security selection” 2. we’re prone to underdiversification 3. we’re prone to holding onto losers too long, selling winners and trading too much. These actions lead to underperformance. Let’s think about how our Monkey mind creates these self-defeating behaviours: 1. We pay too much attention to promoted stories - in the news, from friends, from charismatic CEOs and self-styled gurus. This is the first mistake and leads to picking overvalued, story stocks. 2. We seek out information that confirms what we already believe, become overconfident as a result, and end up placing bets that are too large for their risk. 3. We feel the pain of losses more than twice as much as the joy of gains, so we rarely crystallise our losses in the hope that they’ll return to even. Meanwhile we bank our profits quickly so they don’t turn into losses. These are losing behaviours, but there is hope. The studies show that a subset of individual investors do show consistent, repeated outperformance. It’s not just luck, you can beat the market. My own model for [[What works in stocks?|what works in stock markets]] is designed to address the three primary issues identified above - to [[expose to return drivers|pick better stocks]], [[diversify for resilience|diversify soundly]], and [[maintain your discipline]] through time - with the goal of superior stock market performance. But having a winning top-down plan built on [[simple rules beat human judgement|simple rules]] is just a start. ==Your King sets the strategy, but your Monkey carries it out==. If you don’t have control of your Monkey he can easily sabotage all your best intent. It’s not easy, but the science of habit change is now well understood from books like “Atomic Habits”, “Tiny Habits” and “The Power of Habit”. All behaviours follow a basic pattern of *Trigger → Response → Reward*. When you are trying to rid yourself of bad habits, start by identifying what triggers them and learn to intercept or avoid the triggers. If you look at the list of self-defeating investment behaviours written above, triggers may include: getting investment ideas from mainstream news, following gurus on social media for ideas, searching for information that confirms convictions, or viewing the losses in your brokerage and doing nothing. One of the most nefarious triggers for me is having trading apps on my iPhone. Removing them completely helps my Monkey stick to my King’s plan. Whatever you do, make an effort to stop acting unconsciously. Create a plan that works, develop an investment routine that your Monkey can stick to, and adapt your environment to reduce the triggers that cause emotional or unconscious responses. It’s not as hard as it seems. [^1]: [[Kahneman - Thinking Fast & Slow]] [^2]: [[Barber & Odean - The Behavior of Individual Investors]]