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William J. DeRosa, Jr., CFA
William J. DeRosa, Jr., CFA

Tunnel Vision in Investing

November 22, 2010

There are many psychological pitfalls when it comes to investing. In his recent book, Think Twice: Harnessing the Power of Counterintution, Michael Mauboussin lays out many of these traps which our human brains seem to fall prey. Falling into these traps can be quite easy even for the most experienced investor. Tunnel vision is an example of such as trap. Most of us are familiar with tunnel vision – it is an extremely narrow focus that can cause us to miss some fairly obvious points. Most of us have fallen victim to tunnel vision. There is nothing wrong with intense focus, but when it causes sloppy oversight, the results can be disastrous.

Mauboussin lays out a series of steps to us help avoid this issue.

  1. Explicitly consider alternative. Much easier said than done – we all like to think of ourselves as open minded individuals. Especially those that are highly educated like to believe that we are somehow enlightened. But this usually leads us to false confidence and even over confidence.
  2. Seek dissent. Dealing with individuals who consistently offer a counter or dissenting opinion can be difficult. It can be both frustrating and exhausting, but it will ultimately lead to a better outcome. We have seen numerous examples of companies that had like minded boards and management teams. These companies often were run into the ground because there were no outside views. If there happened to be an outside view, they were quickly silenced (remember Enron?). Conversely, managers who surround themselves with opposing viewpoints usually thrive and grow stronger.
  3. Keeping track of previous decisions. This step is perhaps the easiest to execute – it simply requires diligent record keeping. Yet, it can be an incredibly powerful learning tool. We will learn most about ourselves and our decision-making process. Our human minds have a habit of misremembering important details or confusing the order of events. We have a habit of fondly remembering our greatest success while conveniently ignoring our failings.
  4. Avoid making decisions while at emotional extremes. Let’s face it – this is just generally good advice for all situations. Whether we are investors, physicians, parents or otherwise, when we experience extreme emotions our ability to think critically goes out the window. There are very few decisions we face in life that can’t be deferred until we’ve had a chance to calm down and think through the problem. In fact, there has been a great deal of study done on the topic of emotional intelligence. The ability to keep a level head when things are unraveling around you has been a consistent trait of highly successful individuals.
When it comes to investing, using the above guidelines will improve your process. Considering alternatives, factoring in alternate views, keeping good notes, and critical thinking are all things which can be learned and perfected.

About the author:

William J. DeRosa, Jr., CFA
William J. DeRosa, Jr. is the General Partner of Anthem Asset Management, LLC is an independent investment management company. He has also served as Director of Equity Research and Senior Portfolio Manager at various buy-side asset management firms. Mr. DeRosa is a Chartered Financial Analyst and is a member of The CFA Institute.

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