Mental Blindness – We Don’t Always See What We Think We See

Screen Shot 2015-08-28 at 11.57.00 AMThe past few weeks have been a little nerve racking for me. I recently finished my first book, The Emotional Investor, and the last two weeks were spent proofreading it. I had proofread it, sent it to the publisher where they had three individuals proofread it, and they sent it back to me for the final, final approval. I had my wife take a shot at it this time. She found an error right off the bat, and we encountered one or two more minor errors through the book. How did we all miss this? And why is my publisher assuring me we may still miss something?

It all boils down to something I call “mental blindness.” The bottom line is that we don’t read every word on the page, rather we read most of the words, and the brain will often anticipate what the next word is going to be. So long as that word has a similar length to the “expected” word, we read the word we are anticipating, not necessarily the one that is on the page. That is how several proofreaders can sometimes miss obvious mistakes. In this case, the word written was “be” when it should have been “to.”

Take a look at the below graphic which demonstrates another feature of “mental blindness”:

Screen Shot 2015-08-30 at 8.27.03 AM

Investor Application

It is a well-known fact that many eyewitnesses to crimes are 100% confident in what they saw, but their actual accuracy is much less. That is because what we think we see, and what we really see don’t always match up. This same type of mental blindness can influence investors.

Investors, seeing only what they want to see or what they expect to see, may not recognize what is really happening. This could cause investors to take on too much risk (because they don’t see how things could get worse), or too little risk (how things could get better). One reason why it is often recommended to have a diversified portfolio is to reduce the risk of assets. But another reason is to reduce the risk of mental blindness.

When we make big moves (either all in or all out), we need our perception to be 100% accurate. And that is not realistic. As demonstrated here, the brain makes shortcuts and does not account for every piece of data or read every letter of a word – instead it anticipates what is next and gets the “gist” of the situation. That helps us be incredibly efficient, but sometimes can cause a sort of mental blindness. And in the case of financial decisions, that blindness can lead to costly mistakes.

Best to hedge our investments against ourselves.
 
The Emotional Investor – The Book

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