Do we learn from our investment mistakes?

We all sometimes make poor investment decisions. But do we learn from our mistakes? Why then do we continually fall prey to a financial scam? Or invest in products that lure us with high returns despite realising that such returns cannot be achieved? This week, we discuss why learning from past mistakes is not always easy.

Picture this. Your colleagues rave about a real estate development in your city. From your experience, you believe that the investment may not be optimal. But what if real estate prices in that area skyrocket, and you did not invest? Your System 1 (the intuitive brain) is likely to rationalise that it is less painful to fail with the crowd! So, you invest along with your colleagues despite your System 2 (the deliberative brain) frowning on your decision. If the investment fails to generate the desired return, your System 1 will find ways to moderate the regret. Your experience did not help in deciding because of the fear of missing out (FOMO) on high returns.

Then, there is a hot-cold empathy gap. You invest in digital assets, despite your System 2 telling you that most of these investments are unregulated. You are nevertheless tempted by the returns your friends claim to have earned on their investments. But your investment turns out to be a scam.

You then make a decision never to invest in unregulated products. You have decided in a cold state — a state where you do not have a further craving for such investments. Sometime later, another friend tells you about a non-fungible token, which appears to be a good investment. You yield to temptation and invest again! Why? When you decided to invest again, you switched back to the hot state- the state where there is a craving for such investments. Taking a deliberate decision in a cold state may not help if we later flip to the hot state. Finally, there is present bias. Investing can give you happiness today. A bad outcome, if at all, will happen only in the future.

It is difficult to learn from past mistakes unless we create rules to moderate the biases we suffer from. A simple rule could be to discuss with your spouse, partner, sibling or parents before you make any investment decision. The other person is sure to remind you how a similar investment decision you made in the past that failed.

(The author offers training programmes for individuals to manage their personal investments)