The Little Book of Behavioral Investing: How not to be your own worst enemy (Little Book, Big Profits)

by James Montier

X Unchecked When are we most likely to reply upon our X-System to help us out? Psychologists3 have explored this question and come up with the following conditions which increase the likelihood of X-system thinking: • When the problem is ill structured and complex. • When information is incomplete, ambiguous, and changing. • When the goals are ill defined, shifting, or competing. • When the stress is high, because either time constraints and/or high stakes are involved. • When decisions rely upon an interaction with others. Now I don’t know about you, but pretty much every decision of any consequence that I’ve ever had to make has fallen into at least one or more of those categories. It certainly characterizes many of the decisions that we make when faced with an investment proposition. One of the world ’s greatest investors, Warren Buffett, has said that investors need to learn to control their X-system, “Success in investing doesn’t correlate with IQ once you’re above the level of 100. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” But before we conclude that we have solved all of our behavioral errors, we should be aware that self-control (the ability to override our urges) is like a muscle—after use it needs time to recharge. To illustrate this point, think about the following experiment.4 You are told not to eat any food for the three hours prior to the exercise (actually tim...