Biology and Perspective

Here at HX Research, we spend a lot of time thinking about and writing about human biology and psychology.

We mention biology because we believe that almost all of our psychological biases are hardwired into our bodies as part of evolution.

These psychological biases prevent us from being good (or great) traders and investors. They are also the biases that create significant opportunities for those able to identify them.

We recently read a good note from "The Million Mission" by Davis Wilson. Davis writes a free newsletter about his journey to turn $100,000 into $1 million through trading and investing.

This might sound familiar to some of our readers who have been with us for a while, as we did something similar with "The Hard Money Million Dollar Podcast" several years ago.

Now, our mission was to turn $10,000 into $1 million through legal means!

Trying to increase our money by a factor of 100 led us to take some extreme risks. Davis is doing something much more sensical (haha!), but like The Hard Money team and myself, he has some great lessons for investors in his journey.

We encourage you to sign up for his newsletter, which you can do here.

In his note, he shared a fascinating psychological study that speaks to one of the strongest biases in investing.

Here is the story…

He talks about two versions of a New York Times book review shown to two different focus groups.

Here is the first version:

In 128 inspired pages, Alvin Harter, with his first work of fiction, shows himself to be an extremely capable young American author. A Longer Dawn is a novella - a prose poem, if you will— of tremendous impact. It deals with elemental things: life, love, and death, and does so with such great intensity that it achieves new heights of superior writing on every page.

Here is the second version:

In 128 uninspired pages, Alvin Harter, with his first work of fiction, shows himself to be an extremely incapable young American author. A Longer Dawn is a novella - a prose poem, if you will— of negligible impact. It deals with elemental things: life, love, and death, and does so with such little intensity that it achieves new depths of inferior writing on every page.

As Davis points out in his note, the reviews are very similar.

The only differences are simple changes in words. For instance, "inspired" became "uninspired." There were several other similar changes.

One is a positive review, while the other is a negative one.

The fascinating point about this study is that the NEGATIVE review was judged to be 14% more intelligent and have 16% greater literacy. The negative reviewer was also considered more experienced, while the positive reviewer was considered more naïve.

This is a bias that we talk about at HX Research ALL THE TIME – our biological programming to be negative.

Biological studies have shown that the human body responds to negative stimuli at a ratio of eight to one. This means that our bodies are programmed to respond more to bad news.

As we often point out, this makes a lot of sense when thinking about evolution.

In prehistoric times, eating a good meal sated our hunger and kept us alive for another day. On the other hand, getting eaten by a sabretooth tiger meant the end of our lives and genetic line.

It sounds like a silly example, but it is a powerful one.

The media uses this psychological bias to get us to click on their stories. It is also the bias that the "smart" money uses to get you to pay them hefty fees to manage your investments.

Finally, it is the bias that can end up costing YOU a lot of money.

Our money-making system is based on turning this weakness into a strength. We actively seek out situations where we can take advantage of other investors' overreactions.

Remember this study about perspective the next time you are afraid and thinking of selling. Maybe you will end up buying instead…

Have a good weekend!