Hi Guys,
“The enemy of a good plan is the dream of a perfect plan.” This quote is from Carl von Clausewitz although Napoleon is sometimes credited with a very similar saying.
Clausewitz also stated that “Everything in war is very simple, but the simplest thing is difficult”.
These two salient observations are not new stuff for investors. John Bogle has been preaching this sermon for decades. Here is a Link to a lengthy speech he delivered in 1999:
http://www.vanguard.com/bogle_site/lib/sp19991016.htmlWhat is new (at least to me) are the findings that a growing number of behavioral studies have made to couple these worthwhile attributes to decision making, to both its good and bad outcomes.
One of the leading researchers in these studies is Roy Baumeister, a professor of Psychology at Florida State University. He has countless articles on this topic. It is intriguing that several of his data collection techniques are adult versions of the Marshmallow Test given to children with important adjustments. The modifications are required because the experimental objectives are more complex and nuanced.
For example, one of his goals is to measure delayed gratification depletion over time and over accumulating decision tasks completed. So he is interested in changing (depleting) capabilities. His discoveries just might help an investor’s decision making in terms of preparation, practice, and timing. Here is a Link to a one-hour talk given by Professor Baumeister titled “Willpower: Self Control, Decision Fatigue, and Energy Depletion”:
One of Baumeister’s most repeated experiments was/is a variation of the Marshmallow Test with adults. By this time, he was aware of the original work done with kids that explored the tradeoff between “now” and “later” rewards.
In his work, he dictated that the test adult eat either a radish or a chocolate while the other food was present on a table. For those adults who were ordered to consume the radishes he videoed the same discomfort that the children exhibited in their sweetie challenge.
But the real purpose of the test was conducted in a second session that immediately (like 30 minutes) followed the eating episode. All participants were presented with a devilish, nearly unsolvable geometric puzzle. The test was to determine the persistence that each group exhibited. The radish eaters quit after about 10 minutes of effort; the chocolate eaters persisted for about 20 minutes. Baumeister concluded that self-control is not a constant; it diminishes overtime as it is used and needs reenergizing.
Here is another Link about delayed gratification and self-control by Dan Ariely on the same subject that is much briefer:
These studies all report ways to enhance self-control and subsequent decision making. Delaying gratification equates to self-control. It is a life-long attribute that can be improved with practice. The disparity between “now” and “later” can be summarized as the difference between a cool, reflective reaction and that of a hot, reflexive reaction. The former is more likely to generate a positive outcome.
Investors just might benefit from some of the proposed improvement techniques. For example, be well rested with a full stomach before making an investment decision. For market players that can translate into having a good nights sleep and a hearty breakfast before making a buy/sell decision. That decision is better made in the early morning rather than at the close of the trading day. Self-control is likely to be nearly depleted at that later juncture.
Also, making fewer decisions and spacing them in time conserves body glucose levels and improves the decision process by preserving limited energy resources for tipping point situations. Athletes do this all the time. Since self-control depletion can be corrected by a glucose jolt, it is better to drink a regular coke rather than a sugar-free product to quicken recovery.
Finally, avoid trading temptations that are encouraged by frequent exposure to business news sources. These guys are trained to create excitement, much of which is merely an invented fiction. Like Odysseus, manage the Sirens Song by tying yourself to the mast.
I was prompted to explore this science more fully by a recent Carl Richards NY Times article and drawing. Here is a Link to that piece:
http://www.nytimes.com/2015/01/12/your-money/getting-over-cold-feet-the-case-for-impulse-buying.html?_r=0It cautions us against an analysis paralysis tendency. Determining when “enough is enough” can indeed be a daunting task. All this commentary circles back to the von Clausewitz wisdom that initiated my post. And that’s certainly enough for now.
Best Regards.
Comments
The choice of foods could change the results of the test, could they not?
Thanks for your mouth watering reply. I fondly remember that meal and salivated as I read your submittal.
As attractive as your English dish is, I doubt it will ever be offered as an option in these psychological behavioral experiments. The menu is not clean enough; it is far too complex. Simplicity and clear definitive choices are the watchword for a successful test program. But I love your preferences.
Indeed, the choice of food options could influence the outcomes if not carefully selected. The design details in these behavioral studies is a special craft that is dry-run tested many times and adjusted before the formal experiments are committed.
I’m not fully convinced that all these tests generate reliable results. The test design and the subject selection criteria are critical for meaningful outcomes. The test conductors have become statistically sophisticated so that their experiments are completed with enough participants numerically. However, how these subjects are chosen can be an issue.
The experiments are typically constrained by a tight niggardly budget. Since travel can not be accommodated with these meager resources, far too often the test participants are merely local college students. They are not representative of the total diverse population.
Remember the disastrous 1948 “Dewey Beats Truman” presidential prediction from a highly flawed survey that polled enough voters, but not properly distributed since it over-sampled folks with telephones. Random sampling works much better.
From my perspective, another shortfall is that these experiments put too little skin in the game. The rewards are universally trivial, and I wonder how dedicated the test subjects really are motivated to do their best. Incentives and mood matter greatly.
Best Wishes.
Could relate similar to investing:
"Investing is SIMPLE, getting investors to do the simple things, their problems lie"......tb