Psychology of Misjudgment #11. Simple, Pain-Avoiding Psychological Denial

[LongHaul]

11. Simple, Pain-Avoiding Psychological Denial

"This phenomenon first hit me hard in World War II when the superathlete, superstudent son of a family friend flew off over the Atlantic Ocean and never came back. His mother, who was a very sane woman, then refused to believe he was dead. That’s Simple, Pain Avoiding Psychological Denial. The reality is too painful to bear, so one distorts the facts until they become bearable. We all do that to some extent, often causing terrible problems. The tendency’s most extreme outcomes are usually mixed up with love, death, and chemical dependency."

 

"Denial, avoiding pain or bad news, tends to compound problems. One way around this is being open to the fact that not everything works out the way we expect and it’s not the end of the world, despite feeling like it at the time.

 

In investing, if a loss hurts, selling is the quick short-term answer to avoiding pain. It typically leads to worse long-term returns. The lengths investors go to, to avoid pain ultimately leads to not taking any risk — loss aversion."

 

I think being open minded to problems, mistakes and reality - however unpleasant to hear or deal with helps.

 

 

 

[Guest cherzeca]

denial works to avoid regret for actions taken. much easier to deal with regret for actions not taken

[Guest longinvestor]

11. Simple, Pain-Avoiding Psychological Denial

"This phenomenon first hit me hard in World War II when the superathlete, superstudent son of a family friend flew off over the Atlantic Ocean and never came back. His mother, who was a very sane woman, then refused to believe he was dead. That’s Simple, Pain Avoiding Psychological Denial. The reality is too painful to bear, so one distorts the facts until they become bearable. We all do that to some extent, often causing terrible problems. The tendency’s most extreme outcomes are usually mixed up with love, death, and chemical dependency."

 

"Denial, avoiding pain or bad news, tends to compound problems. One way around this is being open to the fact that not everything works out the way we expect and it’s not the end of the world, despite feeling like it at the time.

 

In investing, if a loss hurts, selling is the quick short-term answer to avoiding pain. It typically leads to worse long-term returns. The lengths investors go to, to avoid pain ultimately leads to not taking any risk — loss aversion."

 

I think being open minded to problems, mistakes and reality - however unpleasant to hear or deal with helps.

 

 

I'm note sure whether it is this Misjudgment #11 but Munger often has said "If you are unwilling to bear a (50%) loss in your holding, you deserve the mediocrity that you will otherwise get". I see this loss aversion mentality & the mediocrity that comes with it amongst already-wealthy folks. One good friend of mine whose family owned a business and reaped a nice windfall selling the business. He put most of his money into annuities! I suppose he'll do alright with the income but talk about choosing mediocrity! I suspect hedge funds also thrive by pandering to this loss aversion mindset of their rich clients.   

[SharperDingaan]

This is really about your investment 'process’.

 

If you learnt by making every mistake known to man, and surviving them (boiler maker) – risk management, and rapid ‘fixing’ of mistakes is as natural as breathing. You are anti-fragile, and arguably, the more organic/murkier the process the better - as the ‘shit and I’ is old mates!  Investing is fun.

 

If you learnt by very technical thesis application (diva), you had a much easier ride – but when things go wrong, you either blow up or have a breakdown. You are more-fragile than you think, prone to thesis denial/tantrum, and cannot handle failure. Investing is fun – but only if it goes your way.

 

Process is one thing, application another.

If ‘boiler maker’ is your thing, you run businesses – not invest in them. ‘Investment’ is merely good cheque-book management, your focus is profit maximization – and value is just a derivative of that. If ‘diva’ is your thing, you invest in the shares of businesses - you don’t attempt to run them. Know your place.

 

Obviously, the approaches are not mutually exclusive, and there is a wide spectrum within each approach. As in a Venn diagram, the number of people who can successfully overlap both worlds are very small. Hence entrepreneurs selling their business - typically becoming very conservative, post sale.

 

SD