“It’s not necessarily a bad thing for investors to be one of Pavlov’s dogs”

Here’s what investors can take from Russian physiologist Ivan Pavlov’s famous study on conditioning.

A happy dog wearing a Foolish jester cap.

Image source: Getty Images

One of the most Foolish things an investor can do is self-reflect. That may come in the form of portfolio evaluation (“am I diversified enough between sectors and income/growth/value stocks?”). It might also be seen as part of a regular refresh of the underlying businesses. “Is the investing case just as strong as when I first bought the shares?”

Equally important, though, is to take a step back and assess whether external influences have pushed us towards certain decisions in relation to our investments. And contrary to what you could be thinking, Saxo Markets‘ CEO Charles White-Thomson believes conditioning — or learned association — isn’t always a negative.

Over to Charles:

In financial markets, the potential danger of conditioning is an important subject we, as an investment platform, have sought to draw attention to. Over the past two years, there has been a surge in interest from retail investors looking to make returns on their portfolios. However, with increasing participation has been a rise in firms trying to capture novice investors’ capital by luring them to use their products or invest in certain assets. Companies have been quick to vie for attention, enlisting famous faces for endorsements to lend credibility and evoke feelings of aspiration and security. The role of influencers, including Kim Kardashian, has rightly drawn the attention of regulators.

Here at TMF, we believe that the person best positioned to take care of your financial future is you. It’s also extremely important to have read a wealth of information about a company before deciding whether to buy shares in its business or not. Many investors have heard stories about someone who had received a stock tip from a stranger in a pub, only to see their investment plummet having put their hard-earned money into it. This is foolish behaviour. Whereas being Foolish means being learned and having confidence bred from thorough background research in a business.

Charles continues:

Those that seek to influence – whether that be YouTubers, celebrities or even traditionally revered institutions like the Federal Reserve – do so based on their experience of the past rather than knowledge of the future. Decisions should be informed by considered research and the core academic principles of proper risk management and diversification.

Again, I can’t help but agree. There’s not a single celebrity that I’d trust enough to buy equities based on a few words from them. Even short, free-to-read articles aren’t enough to base investment decisions off. Not even these editorial posts Fool.co.uk, written by our contractors, musing on their own portfolios! That’s because c.500 words still isn’t enough to be well informed about all the intricacies of complicated businesses. It’s also why we offer time-poor investors access to services like Share Advisor, with full-time analysts doing the legwork.

A critical message for investors, new and experienced, is that successful investing is not just about managing your actual capital or money, it is about protecting your emotions or mental capital. It is not necessarily a bad thing to be one of Pavlov’s dogs, the key however is to recognise and be aware of influence – knowing the bellringers – but also to always be critical of the information presented to you. Behind the Hollywood smile presenting the latest market opportunity is a sophisticated and potentially risky instrument that could have a real-world impact on your savings. Do not be distracted – there is no substitute for thought and due diligence. 

Charles White-Thomson, Saxo Markets

We at The Motley Fool still aim to make the world richer (as well as smarter and happier). And a big part of that is helping investors understand that wealth can be created by spending a long time in the market, having bought and held shares in quality companies. Not selling at the first signs of market turbulence, but instead trusting in your understanding of a business.

Like Pavlov’s dogs, we know that we are all conditioned to some extent. But the path to a happier life is to question conventional wisdom. Much like the court jester — or “motley fool” — did in Shakespeare’s As You Like It! Particularly when popular thought was detrimental to the kingdom’s people…

Fool on!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

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