MICHEL PIREU: Even experienced stock pickers can only guess at future events
Research has laid bare ‘illusions of validity’ yet many still feel entitled to take credit for success
Mark Twain famously quipped "buy land, they’re not making it anymore", in the general belief that houses rarely lose money. However, analysis shows that house prices can fall for prolonged periods and that we tend to underestimate the financial risks associated with buying a home. We are prone to think the world is more predictable than it is, because our memory creates a story, makes that story as coherent as possible and suppresses alternatives. Fast thinking is not prone to doubt. The confidence we experience as we make a judgment is seldom a good evaluation of the probability that it’s right. It is a feeling, determined mostly by the coherence of a story and the ease with which it comes to mind, even when the supporting evidence is unreliable. A person who expresses high confidence usually has a good story, which may or may not be true. Twain’s willingness to believe something on nothing but hearsay lays bare the "illusion of validity", a term coined by psychologist Daniel Kahne...
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.
Subscribe now to unlock this article.
Support BusinessLIVE’s award-winning journalism for R129 per month (digital access only).
There’s never been a more important time to support independent journalism in SA. Our subscription packages now offer an ad-free experience for readers.
Cancel anytime.
Questions? Email helpdesk@businesslive.co.za or call 0860 52 52 00. Got a subscription voucher? Redeem it now.