Identifying your investing blindspots
You can discover one of your ‘blindspots’ by covering your left eye and looking at the black cross in the diagram below.
While focused on the black cross you should still be able to see the yellow circle out of the corner of your eye.
Now slowly move your face towards the screen. At just the right distances (before your face hits the screen!) the yellow dot should disappear.
The reason the yellow dot disappears is that the part of your eye where your optic nerve connects with it can’t ‘see’. Aligning the yellow dot with this part of your eye makes it invisible.
But wait, you might think, if there’s a part of my eye that doesn’t see, surely I would have noticed a black spot in my field of vision?
While understandable, you would be mistaken. Even with one eye covered you typically don’t notice your blindspot. The reason you don’t is that your brain compensates for your blindness. Behind the scenes it fills in the gap.
Normally the brain’s auto-fill function works well. However, it can sometimes create anomalies. You can see this with the following example.
Like in the first task, with this one you should cover your left eye and look at the black cross. However, in this case, when your eyes are positioned correctly, not only don’t you see the yellow circle, in its place you see a red one!
While these examples are visual, the same principle applies more broadly. Just as we have visual blindspots people have psychological ones too.
Those psychological bindspots represent gaps in our knowledge and understanding. And where there are gaps in people’s knowledge and understanding our brains often fill in those gaps, too.
Sometimes our brains fill our psychological blindspots with things that are sensible and reasonable, but sometimes not.
For example, historically people who didn’t know what lay beyond their local shores imagined oceans inhabited by strange sea monsters. Those sea monsters are comically absurd to us now, but seemed eminently reasonable at the time. It was only with increased knowledge and understanding that the sea monsters were replaced with maps of foreign lands and specimens of actual marine life.
And the same concept applies to investors. Behavioural finance research shows that we can be blindsided by some aspects of our investment decisions, particularly by parts of our decision-making that occur beyond our conscious awareness.
Like the visual blindspot, investors might not be aware they have an investment blindspot at all. And while having a blindspot might not matter in some cases, investors risk having their brains fill in the blanks with modern manifestations of ancient sea monsters.
The OpenInvest quizzes are intended to help you identify and overcome your investing blindspots.
* * * * * * * *
About the author:
Simon Russell is the founder and Director of Behavioural Finance Australia, where he provides specialist training and consulting. He holds qualifications in psychology and finance and is the author of two books and numerous articles on behavioural finance.
You might also like to read: