ISMS 23: Larry Swedroe – Do You Allow Yourself to Be Influenced by Your Ego and Herd Mentality?

May 4, 2023

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In this episode of Investment Strategy Made Simple (ISMS), Andrew and Larry discuss chapters of Larry’s book Investment Mistakes Even Smart Investors Make and How to Avoid Them. In this fourth episode, they talk about mistake number five: do you let your ego dominate the decision-making process? And mistake number six: do you allow yourself to be influenced by herd mentality?

LEARNING: Don’t let your ego influence your decision-making. Stay disciplined and avoid becoming irrationally exuberant.

“The market is a predator preying on the mistakes of investors, their egos, and their herd behavior.”

Larry Swedroe

In today’s episode, Andrew continues his discussion with Larry Swedroe, head of financial and economic research at Buckingham Wealth Partners. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.

Larry deeply understands the world of academic research and investing, especially risk. Today Andrew and Larry discuss a chapter of Larry’s book Investment Mistakes Even Smart Investors Make and How to Avoid Them. In this fourth series, they talk about mistake number five: do you let your ego dominate the decision-making process? And mistake number six: do you allow yourself to be influenced by herd mentality?

Missed out on previous mistakes? Check them out:

Mistake number 5: Do you let your ego dominate the decision-making process?

According to Larry, logically, we make mistakes because we are human beings. One common mistake investors make is letting their egos influence their decision-making. No matter what you ask people, they all tend to think they’re better than average. Ego wants us to feel good, so we believe we’re better than average. But, the problem with ego is that it would much prefer to play a game where it only wins and never loses instead of a game where it can win or lose.

Assume you’re a passive investor and put your ego aside because you know you’re unlikely to beat the market. So you choose to invest in the S&P 500, but unfortunately, it does poorly. Since you knew it could go either way, you have no one to blame except yourself.

On the other hand, if you choose an active fund and it happens to outperform, you take credit for your brilliant decision to choose that active fund manager. And if it underperforms, you blame the manager and fire them. Here, the ego would much rather play a game of I win, but I don’t lose, which is what happens if you’re an active investor, not a passive one where there’s no one to blame. Larry believes that’s part of why almost half the number of investors, despite all the overwhelming evidence, choose to invest in active funds.

Larry states that people with more skills have a better chance of avoiding all these behavioral mistakes. They understand the nature of the game they’re playing. They know that they’re competing against the market’s collective wisdom, which is a lot tougher to beat. This knowledge is what protects them from letting ego dominate their decision-making process.

Mistake number 6: Do you allow yourself to be influenced by herd mentality?

Psychologists have known for a long time that crowds can influence us. We want to own the same cars as the Joneses. The fear of missing out causes people to follow the herd very quickly. It’s what causes you to be attracted to the next new shiny thing and jump on the bandwagon. But it takes you a long time to unwind and realize the insanity of what you’re doing.

The key to staying disciplined and avoiding becoming irrationally exuberant is having a thorough understanding of how markets work and knowing that bubbles eventually burst. You also need to have a well-designed roadmap to achieve your financial goals. Have an investment policy statement and set the framework under which you will be investing. Finally, have an understanding of how human behavior can impact investment decisions.

About Larry Swedroe

Larry Swedroe is head of financial and economic research at Buckingham Wealth Partners. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match.

Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has authored or co-authored 18 books.

Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets.

Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect, Advisor Perspectives, and Wealth Management.

ISMS 23: Larry Swedroe – Do You Allow Yourself to Be Influenced by Your Ego and Herd Mentality?

Mistake number 5: Do you let your ego dominate the decision-making process?

Mistake number 6: Do you allow yourself to be influenced by herd mentality?

About Larry Swedroe

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