Evolution and Investing

by Steven Fraley, 6/17/24

steven farleyThe power of changing our minds and adapting to market shifts and evolving landscapes can make us better investors.

In his seminal work, “The Origin of Species,” Charles Darwin proposed that species evolve over time through a process of natural selection. His findings were fundamental to science and ultimately became the foundation of evolutionary biology.

Just as humans and other species have evolved and adapted over time, investors need to do the same to meet the challenges and opportunities of an ever-changing financial world.

Additional Thoughts From a Nobel Prize Winner

Daniel Kahneman won the 2002 Nobel Prize in Economic Sciences “for having integrated insights from psychological research into economic sciences, especially concerning human judgment and decision-making under uncertainty.” He revolutionized our understanding of human behavior in this area, highlighting the role that cognitive biases have in shaping our choices. Much of Kahneman’s work can be summarized in his best-selling book, “Thinking, Fast and Slow,” in which he encourages a reflective and self-aware approach to decision-making to help avoid some very common biases that investors face:

  • 1) Availability Bias – the tendency to rely on readily available information rather than seeking out all relevant information.
  • 2) Anchoring Bias – the inclination to rely too heavily on the first piece of information encountered when making decisions.
  • 3) Overconfidence Bias – the tendency to overestimate one’s own ability or the accuracy of one’s beliefs and predictions.
  • 4) Loss Aversion – the idea that people tend to prefer avoiding losses rather than acquiring equivalent gains, leading to risk-averse behavior.
  • 5) Hindsight Bias – the inclination to see events as having been predictable after they have already occurred, making it challenging to learn from past experiences.
  • 6) Confirmation Bias – the tendency to favor information that confirms one’s preexisting beliefs or values, and to avoid information that challenges them.