We live at the apex of human civilization, but our decision-making processes are still governed by the instincts of our caveman ancestors. Cave people did not have the luxury of making a lengthy analysis of all available options, because those who were slow to react got eaten by tigers and did not live to reproduce.
We like to think that we make purely rational decisions in investing, or indeed in life in general. But in fact, we are as reactive as our ancient relatives. The instincts that allowed us to survive back then often lead us astray today. As investors, we’re hired to manage portfolios, but we probably spend just as much time managing emotions. In our Cognitive Biases series, we described these common emotional “shortcuts.” Understanding and controlling these biases helps us avoid costly errors in judgment.
Recently, an old-school mall retailer GameStop was in the news as the stock price soared from $4/share last September, to $16 on January 1st, hit $480/share briefly on January 27th, and is now back to $52.40. In fact, this company will likely go bankrupt later this year, so what accounts for the crazy ride?
For our seminar, we explained the emotions that drive investors to overpay for stocks. Armed with this knowledge, we can avoid being "swept up by the madness of crowds."
Presenter: David Edwards, president of Heron Wealth
Moderator: Buff Parham, president of Parham & Associates