The Little Book of Behavioral Investing: How not to be your own worst enemy

Chapter One

In the Heat of the Moment

Prepare, Plan, and Pre-Commit to a Strategy

 

 

 

 

 

 

EMOTIONAL TIME TRAVEL ISN’T OUR SPECIES’ FORTE. When asked in the cold light of day how we will behave in the future, we turn out to be very bad at imagining how we will act in the heat of the moment. This inability to predict our own future behavior under emotional strain is called an empathy gap.

We all encounter empathy gaps. For instance, just after eating a large meal, you can ’t imagine ever being hungry again. Similarly, you should never do the supermarket shopping while hungry, as you will overbuy.

Now let’s imagine you are lost in some woods. As you search though your backpack you discover that you have forgotten to bring both food and water. Oh, the horror. Which would you regret more: not bringing the food or the water?

Psychologists⁵ have asked exactly this question of two different groups and offered them a bottle of water in return for participating. One group was asked just before they started to work out at a gym; the other group was asked immediately after a workout. If people are good emotional time travellers, the timing of the questions should have no impact at all. However, this isn ’t the pattern uncovered by the researchers. Sixty-one percent of the people who were asked before the workout thought they would regret not taking water more. However, after the workout, 92 percent said they would regret not taking water more!

My all-time favourite example of an empathy gap ...