Understanding the Behavioral Continuum on Your Way to Becoming a Better Investor

Shreenivas Kunte, director of content at the CFA Institute, recently wrote about the Behavioral Continuum and how it affects our decision making process. He contends that “behavioral patterns extend across a wide continuum. On the darker side, they can generate negativity or lead to disaster. On the lighter side, they are useful, even essential.” Thus, Kunte cautions that “being mindful about the structure and continuum of these patterns and their potential paradoxes is critical for investment decision makers.” He addresses the following four behavior biases: skepticism, optimism, status quo, and pessimism. Skepticism is ” the ability to doubt, to question, and — hopefully — to investigate.” Further, used appropriately, “skepticism helps to keep emotions on a tight leash,” and can be helpful to investors because “healthy and consistent skepticism is largely beneficial.” Optimism, on the other hand, probably caused the 2008 financial bust. As Kunte puts it, “optimism and its counterpart, pessimism, are key contributors to booms and busts.” The opposite, pessimism, is when one behaves like the worst-case scenario is inevitable. While this can result in missed opportunities, pessimists can play devil’s advocate in investment decisions.  Status quo bias is the desire to extend existing conditions, which can reduce portfolio churn but also result in missed opportunities.  Readers of the CFA Institute Financial Newsbrief were polled on which behavior biases they thought were the most useful: Skepticism won by a wide margin. In any event, agile, self-aware thinking is essential to stay on the right side of all behavioral patterns.