Thursday, December 6, 2018

Why is simple so hard???

It’s quite astonishing how most of our tasks are consciously or unconsciously related to ego satisfaction.We tend to keep feeding our ego in numerous ways so that dopamine can be released.We tend to abuse our body, time, wealth etc. just for a tinge of dopamine rush caused by ego satisfaction.

It’s weird how we humans always correlate hard work with ego satisfaction.Hard work generally gives us a sense of worth, a sense of usefulness, a sense of accomplishment at a subconscious level.We humans generally tend to appreciate hard work and complexity more to smart work and simple approaches.
Let us understand the same via a simple story,
There was a competition between two best woodcutters of a village,Ram and Shyam, as to who will be the one who will chop the maximum amount of wood in a span of 2 weeks. A poll was conducted before announcing the result just giving out simple stats that Ram used to cut wood for 12 hours each day and Shyam used to cut wood for only 6 hours each day. Most of the people voted that Ram will be the winner, but the results were just the reverse.Shyam used to sharpen his axe for 2 hours each day before cutting the wood. Thus, even though Shyam used to work only for 8 hours a day, 4 hours less/day than Ram, he won the competition. But the expectation of most of the people that Ram will win based on his hard work shows how human psychology asserts more value to hard work even though it might be futile.

A kind of similar psychological framework works in the investment world where we simply let go of historically proven profitable strategies, because it's hard for the ego to digest that one can create returns without extensive research and hard work. Saurabh Mukherjea, founder Marcellus Capital proclaimed how even he was skeptical as to how his “Coffee Can Investing” can outperform benchmark indices on a consistent basis, as the strategy is so very simple.The Coffee Can Investing Strategy involves  looking for firms that have delivered minimum pre-tax RoCE of 15% or more and sales growth of at least 10% or more over ten consecutive years. For financial services stocks,it seeks to identify firms that have delivered a minimum RoE of 16% and loan book growth of at least 10% or more for ten consecutive years. Back-tests of the framework for each suggest that in 16 out of 17 iterations, the Coffee Can portfolios have comprehensively outperformed the benchmark Sensex index both on an absolute as well as on a risk-adjusted basis.

So isn’t it that the extensive hours of hard work fund managers, research analysts and other people in field of stock markets put in, just on a subconscious level to attain a feel of satisfaction that they have worked hard. Similar tricks are played by our mind in daily lives too.
For example, compare people who the travel to Vaishno Devi Temple on mules and who walk it to the temple. People who walk it to the temple feel a greater sense of satisfaction because of the extra hard work and the perils they face. Though both the categories, one which travels on the mule and the one which walks it, fulfil the same objective of visiting the temple, finding greater satisfaction levels by the people who walk it is indeed surprising and a subtle play of the ego satisfaction derived by extra efforts.

Ego-satisfaction impacts the way we research and leads us to put in unnecessary efforts, which might not even contribute on how successful our investment bets actually are, the same has been explained by the Pareto principle stating : “80% of your results will come from 20% of your efforts.”
In the investment world- not only do investment processes get affected by the ego-satisfaction trap played by the mind but the same trap, additionally leads to become the root cause of various behavioral biases and cognitive errors faced by various investment professionals . For example,

  • Confirmation bias- (`Confirmation bias, also called confirmatory bias or myside bias, is the tendency to search for, interpret, favor, and recall information in a way that confirms one's preexisting beliefs or hypotheses. It is a type of cognitive bias and a systematic error of inductive reasoning) is directly a by product of ego-satisfaction. We tend to give less weightage to negative news to the stocks we own as its against us ( our ego) and give greater weightage to positive news pertaining to the stocks we own, as it boosts our ego that the analysis of our stock is on point.
  • Disposition effect- (The disposition effect is an anomaly discovered in behavioral finance. It relates to the tendency of investors to sell assets that have increased in value, while keeping assets that have dropped in value.) Its our ego which does not allow us to accept that we are wrong, which in turn leads us to carry losers way longer than we should.

Thus,once we get aware about our ego-satisfaction desires and start curbing it, we can maximise our efficiency and utilise our time in the best possible manner. Awareness of the same  will help us to understand whether our efforts are actually productive, or are just merely for feeding our mental need of ego-satisfaction.

Hence, once investment professionals are able to detach themselves from their ego a lot of behavioral biases will vanish, investment results will improve and most importantly a lot of precious time will be saved from unproductive ego-satisfying activities.


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