The pitfalls of human thinking in investments: why we make wrong decisions more often

In the world of investment, it is not just the expertise or market knowledge that decides on success or failure. Rather, psychological factors, unconscious mistakes in reasoning and cognitive distortions play a decisive role. These subtle misconceptions affect our behavior in crucial situations so much that they are likely to have false or unwiseto make decisions significantly. Especially in times of high emotional stress or in the event of uncertainties, these thought-outs of fire accelerators, which make our ability to judge, make it difficult to judge. Understanding these mechanisms is essential to make smart financial decisions in the long term and not become a victim of unconscious pitfalls.

Automated thinking: the danger of comfort in your head

The human brain is basically designed to make decisions as quickly and with minimal effort as possible. This is a survival strategy that helps us a lot in everyday life because it protects us from being overwhelmed. Instead of carrying out a complex analysis every time, our heads fall back on rules of thumb, plausibility checks and so-called heuristics – simpleRules of decision that guide us through everyday life. Daniel Kahneman describes this approach as “fast thinking” where our brain switches to autopilot, so to speak. But this is exactly where the danger lies: Our rational, logical part, the so-called Neocortex, is often bypassed or booted out in this automatic system. That means we believe, we think consciously and controls,Although our subconscious often only decides on the simplest patterns. This means that we make decisions that we think is right in retrospect, although in reality we only react on an emotional or intuitive level. Those who are aware of this fact gain an important basis for questioning their behavior. Because who in the long termwant to ensure quality of life should try to deliberately think more slowly in order to put the conscious, logical considerations in the foreground. This is the only way to use the potential of “slow thinking”: to act smarter, more sustainably and more sustainably.

Short-term frame of reference: why they often harm

A frequently recurring problem for many investors is using a time horizon that is far too short to evaluate their investments. Many only look at the performance within a single year, sometimes even just at the last months or quarters. The financial industry has shaped this practice for decades: investors are conditioned toassessed on an annual basis. For wealthier customers, it is common to measure the development even on a quarterly basis – as if that were the only relevant period of time. But why? There is no convincing reason why you should only refer to a few months or a year as a reference. Why not choose a longer period instead, for example several yearsOr even decades? The answer is simple: In an agricultural society, it makes sense to measure crop yields within a short period of time. But when it comes to valuing capital investments, this is counterproductive because short-term assessments lead to impulsive actions and short-sighted decisions. A concise example of this is a conversation with a client who is in the summercertain year came to me. He was deeply disappointed because he had lost half his money within a year. His comment: “I had a profit of a certain percentage last year, now it’s only half of it.” At first I thought it was a joke, but it quickly became clear that he meant the seriousness of his words. For him, the lossHuge, although he had a good year before – and completely ignored the fact that losses of up to a third or more are normal in a sustainable strategy in the long term. He also overlooked the fact that his investment horizon, which usually spans several years or even decades, has long since survived all short-term fluctuations. He just wanted the last months or the last yearand draw conclusions from it, although this had little to do with the actual development of its asset strategy. What he completely overlooked is the fact that setbacks are usually an integral part of any sustainable investment. Losses of up to a third or more are part of it – and that is inevitable even with the best strategies. Nevertheless, you wantOften only see the positive developments and downplay the losses. The result: short-term frames of reference lead to impulsive behavior, panic sales or unnecessary reallocations that jeopardize long-term success. Anyone who is aware that the entire facility is based on a long-term horizon creates the basis for a calm, disciplined approach tofluctuations and setbacks.

Personal story: An example of emotional investing

I would like to tell you a personal story that shows, for example, how emotional reactions to losses can have a lasting effect on wealth. It’s about a successful entrepreneur, whom I looked after in the summer of a year. He was an intelligent, sensitive person who was passionate about art and music. He was generous, donated regularly and wasBasically a very reflective person. But his investments showed another side: After a loss that he found particularly painful, he quickly decided to dissolve his entire system and keep it in cash. His core argument: “I don’t want to take any more risks, I just want security.”But the real tragedy was his emotional reaction. He had completely hidden the past years in which his systems had grown significantly. His decision to sell everything and keep it in cash was a reaction to fear – an escape from further losses. He ignored that his long-term horizon was still years or decades away and thatFluctuations belonged to the normal course of a sustainable investment strategy. His action led to his investments in the future, although the market opportunities would continue to exist. This example shows: If you only look at short-term developments when making your investments and make your decisions emotionally, you harm yourself. The result can bethat they lose sight of their long-term goals and endanger their financial future. It is important to keep in mind that investing success is a matter of discipline and long-term orientation. This is the only way to avoid the emotional roller coaster and increase the chances of sustainable success.

Wrong reference points: Why comparisons are often misleading

Another common mistake among investors is choosing the wrong comparison size or benchmark. Many believe that the so-called German leading index is the right benchmark to judge your own investment. However, this is a big misjudgment. The DAX, as the most important German stock index is called, is only a tiny excerpt compared to the global markets -A small village in a huge world full of markets, industries and currencies. Germany has made up only a small fraction of the global stock markets in the past. For private investors this means: The assets usually consist of several components such as your own workforce, real estate and insurance that are not in the depot. The portfolio, on the other hand, consists ofinternational stocks, bonds, mixed funds and other securities. These are usually less risky than the DAX because they are widely spread and cover different asset classes. If the German stock market is doing well, the portfolio often looks weak – because it doesn’t just consist of German stocks. And if the prices fall? Then the Dax moves into theBackground and investors are looking for another benchmark, for example the fixed-term deposit with minimal interest. This is dangerous because it leads to a distorted perception: You no longer measure success by the comparison variable, which is really relevant, but by one that has hardly to do with your own reality. The result: The investor builds a world of permanentDissatisfaction because he constantly measures himself with the wrong standard. A vivid example is an entrepreneur I have accompanied over the years. Years ago, he had a large position in a precious metal – gold. He was convinced that he was on the safe side. But his emotional fixation on the course he saw when buying ledto constantly criticizing the development of his investment. He overlooked the fact that the actual value of his position is much more important than the price he bought for. In contrast, there was another investor who had also invested in gold, but in a different way: He had acquired a larger position at a much cheaper course and the highest priceachieved in the past. For him, it was a strategy that had paid off. But in reality he was only favored by luck, while the first investor caused more damage by fixing it on the entry-level course. This example shows: It is pointless to only evaluate individual securities based on their entry prices or short-term highs. It is much more important thatKeep an eye on the overall portfolio and the long-term strategy. Otherwise, you run the risk of falling into a heresy where you only look at past profits and ignore the actual risk structure.

Performance traps: why constant chase is harmful

Another big problem is the so-called performance chasing: Constantly comparing your own investments with the latest trend funds or the most successful stocks. Many investors are convinced that they can only find the right investment by looking at the best past results. It doesn’t matter whether you read serious magazines or supposed insider tips -The truth is: There are more and more funds than stocks, and hardly any fund will be at the top permanently. So if you constantly rearrange your systems to grab the supposed “winner”, you’re acting similar to roulette: You always rely on the number that just fell. This only leads to systematically destroying your assets by constantly switching back and forth. theKnown theorem that past performance is not a reliable indicator for the future is often ignored. The permanent exchange of products is good for banks, and for investors usually a bad one. The result is a spiral where you keep buying new products to seize the supposedly best chances – just to find out in the end that theown costs, taxes and transaction fees reduce the return. Many investors are so busy catching the next trend that they lose sight of the actual strategy. If you have the urge to constantly rebuild your portfolio, you should ask yourself: why? Take risks only if you really believe in a strategy thatthey can pursue in a disciplined manner. Otherwise, you risk putting yourself in a situation where you are only looking for the short-term stroke of luck – and lose sight of your long-term goals. A solid, long-term strategy that is consistently pursued is the best way to build sustainable wealth and not the thrill of short-term happiness.

Keep calm and stay consistent

The central credo is: stay Calm down and don’t let short-term influences or emotional reactions lead you. Instead, you should develop a clear, understandable and sustainable strategy that you can implement in a disciplined manner and can also persevere in difficult phases. This is the only way to secure your standard of living in the long term and can your assetsbuild that it improves your quality of life in the long term. The most important lesson is: Those who act slowly and carefully are usually the winners at the end – and those who consistently pursue their strategy have the best chance of staying successful even in turbulent times.