The dangers of overconfidence lead to a vicious cycle of continued negative behaviors that greatly impact investing success. One of the bi-products of overconfidence is selective memory. Very few of us like to remember painful experiences especially past failures. The inability to use failure positively contributes to a distinct avoidance of failure.
This avoidance directly advances selective memory. We chose to remember only the positive aspects of our past decisions which reinforce our positive self-image. We tend to avoid any realities of the pain caused by loss or poor decisions about money. This create a vicious cycle and puts us much like a hamster on a wheel going round and round using the identical flawed decision making process which caused our original pain.
Selective memory becomes a key reason why victims of scams have a multiple history of being scammed. Yes there are other major factors in becoming a serial victim but selective memory is a core element in this process.
This selective memory process is a form of correcting for cognitive dissonance which is a well-accepted theory in Psychology. This theory suggests that holding two apparently disparate ideas, opinions, attitudes, beliefs or behaviors at the same time and therefore our psyche will need to find a correction for this.
Over time we will correct to ensure that the memories are congruent with our self-image belief. We need to adjust the reality to conform to our own comfortable self-image.
We also are guilty of pacing too much weight on the recent short-term evidence while making decisions and ignoring long term evidence that adds weight to our risk analysis.
The best way to overcome this negative behavior trait is to journal your decision making process when making an investment. This will leave a permanent record of your attitudes, beliefs and values at the time of the investment. This record will allow you to determine the true value of the investment decision and whether your decision making process was sound at this time.
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