What makes investing difficult to learn? (part 4)

4.  The process sometimes requires substantive amounts of unlearning.

Learning does not happen in a vacuum.  Whenever we learn something, we fit that new piece of knowledge into our existing base of prior knowledge.  But what happens if our prior knowledge is flawed?  How difficult is it to learn new and better ideas when such ideas contradict existing knowledge?

For example, we might know that we only use 10% of our brains.  Or that Thomas Edison invented the light bulb.  Or Eskimos have hundreds of words for snow.  Or lemmings commit mass suicide by diving off cliffs.  Actually, if we know any of these “facts,” we should do a little research and a lot of unlearning, since none of them are true.  But if we insist on believing such erroneous information and ignore any new information that contradicts these “facts,” we will have a difficult time learning anything new and potentially more useful.

People don’t relish the prospect of being forced to make adjustments to what they already know, especially in areas in which they have strong feelings.  Unlearning requires more effort than maintaining the status quo.  The process might be laborious, and we are not sure whether anything useful will result afterwards.  A change could force a whole bunch of other related changes, and the idea of wholesale changes of one’s store of knowledge requires more energy and brain power than most are willing to employ.  Have you ever changed someone’s mind about heated topics such as politics or religion?  The mental rearranging required to make a substantive change is enormous, thus few people ever undertake such a task.  Academic research on the topic of learning shows that people will continue to use a familiar strategy that works moderately well rather than switch to a new strategy that would work better.

In the investing world, some of what we already “know” might not be true.  For example, we might think that the best run companies make the best investments.  Or faster-growing countries’ stock markets outperform those of slower growing economies.   Or that risk can be measured on a single linear scale.  Or that rising markets are always good and falling markets are always bad.  These are just a few of the ideas that should be unlearned if one is to be a successful investor.  However, the intuitive thinking behind such concepts can be deeply entrenched, and arguments that disprove such assertions will be difficult to accept.

To open yourself to the idea of unlearning, you should recognize that you do not have all the answers, and you should be open to questioning what you think you already know.  If you are confronted with a situation that challenges some of your assumptions, you should try to take as objective a look as possible to examine whether your initial ideas or the new idea have more flaws.  You should be diligent in countering the reflexive reaction to dismiss any contradictory information that conflicts with your long-held beliefs.

In conclusion, investors who succumb to the learning obstacles outlined in this series of essays are doomed to never learn from their mistakes.  This lack of learning provides a good explanation why many investors make the same predictable types of mistakes during each market cycle.  Those who do not make the effort to learn are doomed to repeat their errors.  Don’t be one of them.

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