The traps of human thought in investment decisions: why we often take wrong paths

A variety of cognitive bias affects our decision-making behavior significantly and drastically increases the likelihood of making wrong decisions. Irrelevant temporal reference points, false benchmarks and misleading reference variables are particularly problematic. These mistakes in thinking act like fire accelerators on the basic human emotions such as fear,greed and overconfidence. They distort our perception of reality and lead to decisions that can have a negative impact on the long term. It is becoming increasingly clear: our brain is designed to minimize the effort involved in thinking, because real thinking is exhausting and sometimes painful. That’s why we tend to make many decisions automatically – with rules of thumb,Plausibility checks and so-called heuristics. American psychologist Daniel Kahneman describes this quick, intuitive thinking as “System 1”. The danger lies in this: Our rational, logical mind in the frontal lobe – the so-called “System 2” – is often booted out. We just think we think, although in truth we only react automatically. For a sustainableAsset planning you should be aware of this fact: In long-term strategies, it is essential to consciously slow down the pace and sharpen the mind.

Short term reference points: The biggest trap for investors

The most common mistake I see in investors is using far too short periods of time as a reference point for reviews. Many only assess their performance from the beginning to the end of a calendar year – i.e. on an annual basis. For decades, the financial sector has so conditioned the performance of this short time frame, and often even with wealthy customersquarterly. The reasons for this are unclear because they make little sense. Why not use the period from the middle summer month to the late autumn of the following year? Such short-term references are generally unsuitable for the valuation of investments. They only lead to short-sighted decisions because they do not depict long-term perspectives. an exampleis a conversation with a customer who came in the summer of a year to tell me he was deeply disappointed because he had lost half of his assets. His original quote: At that time he had gains from a good return, now only small increases are left. It took me a while to realize that this wasn’t a joke, but his bitter seriousness. There is oneModerate returns just above inflation, not the same as a total loss. But many investors don’t care much about the long-term perspective and only concentrate on short-term figures. Your argument is usually: “I want to win quickly.” In doing so, they neglect that a long-term strategy has to accept setbacks and that they even have to accept setbacksare unavoidable. It is only a matter of time before reality prevails against the wishful thinking.

Personal story: Lessons from Borchert’s wrong decisions

Why am I telling you this story? Because the behavior of this customer shows how short-term thinking and emotional reactions can affect the assets. After selling his investments because he could hardly bear the losses, the money was still uninvested years later in a checking account, without interest and without growth. His plan was to quickly gain profitsachieve, but his fear of further losses, he became more and more anxious. This behavior has not only robbed him of his attitude towards life, but also significantly restricted his financial leeway. It shows how a wrong time horizon interpretation leads to losing sight of the big picture and setting wrong priorities.

Long-term asset planning: More than just short-term action

Asset investment is all about securing your own standard of living in the long term and using the assets in such a way that it increases personal happiness and satisfaction. Nevertheless, one often looks in vain for a strategic, long-term approach to securities among private investors. A colleague describes it like this: “When a customer says long term, meanshe to the next major market correction.” The paradoxical strength of the investment – its price transparency and constant availability – becomes a most dangerous problem. The more disciplined you are, the more it can harm if you are able to consume impulsively at all times or restructure your assets at short notice. This is not a law of nature, but a conscious onedecision. You must always remember: An investment in the capital market should be viewed as a property. The investment horizon is not equal to availability, but usually the opposite. As long as you follow this basic rule, you are on the safe side.

The error of just fixing on the original entry price

Another classic mistake is the fixation on the original purchase price of an investment. Many investors – and also bankers – only compare how much the position deviates from the initial price today. It is completely ignored that the portfolio should be considered as a whole. Whether a system is good or bad does not depend on the comparison with the original entry pricebut rather from their meaningfulness within the overall strategy. A dangerous fixation on the highest course you have ever seen is created. I’ve seen how difficult investors find it to part with highly speculative investments like cryptocurrencies or tech stocks when they’re falling back in value. They forget that a high course is only a temporary oneSnapshot is that does not guarantee long-term success. An example is an investor who bought gold coins in 2012 at a price of several thousand euros per ounce. Years later, she was angry because the price had fallen back to her entry level and sold her coins. Another investor bought a gold investment in the same period for significantly less money, which was clearly in the coursehad risen. For both of them, the question of what to do now is completely irrelevant. It’s not about the temporary course, but about the role of the system as a whole. Fixing on the highest course only leads to irrational decisions.

Distorted benchmarks: why the DAX is deceiving

Another common mistake is using the DAX as the sole benchmark for your own investment. Many investors – and even many bankers – consider the DAX to be the “market” against which the development of their own investments can be measured. This is wrong. In an international comparison, the DAX is only a small, regionally limited stock market barometer with high risk values.Germany accounts for only a small fraction of the global stock market and the DAX represents only a snippet of it. The assets of an average German consist primarily of his labor power, real estate ownership and insurance – i.e. outside the deposit. The portfolio mostly contains international stocks, bonds or mixed funds, which is a significantly lower overallrisk than the DAX. If the stock market is doing well, the depot often appears worse because it looks “weak” in comparison. In the case of price declines – for example due to a crisis – the DAX is becoming the focus. Many investors then resort to secure fixed-term deposits, which hardly bring any interest, but are supposedly less risky. This distortion leads to a distorted perception of one’s own situation andcan lead to wrong decisions. Mr. Borchert, who was already desperate at plus 7 percent and didn’t know what to do when he was minus 50 percent, is an example of this irrational approach.

Performance Chasing: The Dangerous Hunt for the Best Return

Another common misconduct is the so-called performance chasing. Investors do not compare the overall portfolio, but individual funds using short lists from magazines or rankings. It doesn’t matter whether you use serious sources such as financial tests or supposed “financial porn”. The reality is: There are significantly more funds than stocks, and most cut in thefar worse in the past than expected. Those who are now reallocating now usually buy the fund that has done best in the past. It’s like always betting on the number that fell last time in roulette. The well-known adage “Past is not an indicator of the future” is consistently ignored. The constant switching back and forth betweenProducts is a lucrative business for the banks, but a bad for the investor. Anyone who is always looking for the supposedly best products risk losing their assets. If you want to speed it up, switch to the strategy that seemed most successful in the past: This has often only worked for a short time in the past. RememberThe Wanderer couple: In the year of a stock market crisis, this sold all the shares to flee into supposedly secure real estate funds. Such decisions cost time, joie de vivre and a lot of money.

The search for the perfect investment: A wrong way

It’s pointless to be constantly looking for the ultimate investment or the big jackpot. That costs energy, nerves and a lot of money. Instead, you need a reasonable, long-term sustainable strategy that you can consistently pursue. This strategy should be designed to secure your standard of living and to increase your assets in the long term. she shouldn’tPromise short-term happiness, but rely on stability and continuity. This is the only way you can permanently secure your wealth accumulation and at the same time increase your quality of life. The most important thing is to stay disciplined, not be seduced by short-term trends and never lose sight of your own goals. This is the only way your assets will remain a reliable companionOn the way to a happy and happy life.