Investing is the Study of Human Decision Making

In our recruitment of young analysts, the most common reason cited by interviewees for choosing investing as a profession is because they like numbers or the few evolved souls who say they like analysing businesses. Whilst many of us started our careers with similar views, we came around to the view that investing is largely about human behaviour than anything else. The psychology of investing is what Barry Ritholtz of Ritholtz Wealth Management talks about in this blog, going to the extent that even if you were not interested in investing, studying the investment decision making process of practitioners can be a science by itself. A very interesting quick read as usual from the folks at Ritholtz:
“Perhaps this is why my definition of investing differs from the mainstream:
“Investing is the art of using imperfect information to make probabilistic assessments about an inherently unknowable future.”

There is a lot of nuance packed into those 17 words.
– “Art” refers to the fact that this is not a science, and there is no single optimal solutions for everybody.

– “Imperfect information” refers to the fact that the information we have is dynamic, at best incomplete, often confusing, and frequently wrong. No one can possibly know all there is to know at any given moment.

– “Probabilistic assessments” recognizes lots of outcomes are possible; we need to plan for not one but many potential future results.

– “Inherently unknowable” is a very humbling acknowledgment of how little we actually know about the future. Nearly all of the time, we do not – and cannot – know what comes next. This should be reflected in how we invest.

– “Future” demands optimism. Pessimists have been on the losing side of the trade for all of human history. Even setbacks like the dotcom implosion, the GFC and the pandemic were temporary. Pessimism is a bet against human ingenuity, and that has been a losing wager.”

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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.