Jim O’Shaughnessy: The Best Way For Investors To Control Their Psychology And Emotions – ValueWalk Premium
Emotions

Jim O’Shaughnessy: The Best Way For Investors To Control Their Psychology And Emotions

During his recent interview on The Profile Telegram Chat, Jim O’Shaughnessy provided some great insights into how investors can control their psychology and emotions when it comes to investing decisions. Here’s an excerpt from the interview:

Q1 2021 hedge fund letters, conferences and more

Emotions

Q: What have you seen are the best ways for investors to control their psychology and emotions during bull and bear markets?

I’ve long said that the Four Horsemen of the Investment Apocalypse are fear, greed, hope and ignorance. Only ignorance is not an emotion.

We unfortunately are optimized for an environment that no longer exists. When our fight or flight instinct kicks in, it literally takes over the decision-making in your brain. That’s why I often say there’s a big difference between understanding something intellectually and emotionally. My solution was to become a quantitative investor whereby all of our models and algorithms that we have built buy and sell securities based on our research. This has allowed me to in essence gate my very human emotional responses using the models.

If quant isn’t your thing, there are several ways to deal with these emotional take-overs. One would be to have a friend or significant other that you can discuss the emotional reaction with, kind of like a co-pilot. I have a friend in Vienna who is not a quant at all, but notices when his emotions are rising, and then he immediately gets up from his computer, puts on some running gear and takes a run, which allows him to break the emotional cycle that he was spinning into.

Q: How do you generally avoid blind spots/bias — do you run these by outsiders or members of your team?

Good question. We all have blind spots and simply acknowledging that they exist helps us to understand and look for them. I think we’re making a mistake when we think that we have a complete solution to almost anything.

Try following as best you can a “scientific method” where you are continually asking questions, putting them to the group, and always have an error-correction methodology as part of your process.

People sometimes confuse bad outcomes with bad decisions. I tend to look at outcomes in aggregate and not individually. I also try to use mistakes as learning opportunities and get excited when I find something that can make me a little less dumb than I was yesterday.

You can read other excerpts from The Profile Telegram Chat here:

Jim O’Shaughnessy The Profile Telegram Chat

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