Guest Post: It's Expensive to Have Ideas

By: Anika Hedstrom

This week's blog is by our esteemed Connected Finance Panelist, Anika Hedstrom. At Citizen, we're using design principles Ms. Hedstrom describes below in our design work with a number of financial services companies.

Simone Biles, four-time gold medalist and arguably the best gymnast of the modern era, hasn’t reached the pinnacle of her sport by accident. Most of her success can be attributed to her rigorous training regimen—for nearly a decade, she has spent upwards of 50 hours a week in the gym. In sports, and so often in life, the harder one works, the better one becomes.

But does this work in investing? No. The more you do, the worse off you will be.

Say what?

We know the more you work out and lift weights, the more muscle you gain. Similarly, the more you read, the more vocabulary you learn and incorporate into your vernacular. So how is investing different?

Investors have behavioral tendencies which can be provoked by various things, including dull markets, increased confidence from obtaining new information (think recent business school grads), or people with more time on their hands (retirees). Whatever the case, investors are impatient with remaining idle—better to do something, they think, then nothing at all. So they dial up the volume on CNBC and increase the time spent reading financial magazines.

Investors have behavioral tendencies which can be provoked by various things including dull markets.

All of this can be disastrous to your financial health. Nobel Laureate Daniel Kahneman, who has devoted over 40 years to studying the psychology of judgment and decision making, says, “the more closely you pay attention, the more you do things. And the more you do things, the worse off you will be.”

One of Kahneman’s former students, Terrance Odean, a professor at the University of California at Berkeley, researched just how worse off you can become. He studied trading records for hundreds of thousands of investors, and demonstrated that when people had a choice of two stocks to sell, they were more likely to sell the stock that did better in the future and held onto the one that underperformed. When they purchased something new, the stock tended to perform worse than the stock they previously sold.
Just how much does frequent trading cost the average individual investor? 3.8 percentage points a year. As Kahneman put it, it can become expensive for people to have ideas.

So what can we do to become better investors?

Focus on what you can control. We can’t control or time the markets, as no one has tomorrow’s paper. But we can control how often we trade, what we pay for our investments, and where we invest. Index funds outperform 80 percent of hardworking, intelligent, active Wall Street managers. Putting our money where it counts, and ultimately benefits us the most, allows us more time to engage in activity that adds value in our lives.

Focus on what you can control. We can’t control or time the markets, as no one has tomorrow’s paper.

While you may not be the next Simone Biles, you can now focus on areas where it pays to have new ideas—like starting a new business, improving your health, or learning a new instrument. Just remember that taking action, for the sake of doing something, is disastrous to your wealth.

Highlights from the Connected Finance panel coming soon!