Becoming a Better Investor:  Simple, Pain-Avoiding Psychological Denial Tendency

Investing is accessible to all of us. And with the right mindset, it can yield meaningful returns. Legendary investor and longtime Berkshire Hathaway Vice Chairman Charlie Munger often emphasised how human psychology influences our decisions, both in life and in the markets. He outlined 25 core psychological tendencies that drive behavior, suggesting that understanding these biases can help investors sidestep common pitfalls and make smarter, more rational choices.

This week, we’re diving into tendency number eleven: the Simple, Pain-Avoiding Psychological Denial Tendency, and how this can have a negative impact on us as investors.

What is it?

To put it simply, this tendency is about being in a state of denial or avoiding bad news altogether.

Munger talks about how he first encountered this tendency — when the son of a family friend flew across the Atlantic during World War 2 and never returned — and his mother refused to believe he was dead. Munger says, “The reality is too painful to bear, so one distorts the facts until they become bearable. We all do that to some extent, often causing terrible problems.”

We often resist facing uncomfortable truths by choosing to pretend it’s not there. We might even distort reality to shield ourselves from emotional discomfort. And it’s human nature. But this can have negative consequences down the line.

How does it play out in the world of investing?

This tendency refers to our natural inclination to reject or distort reality when it becomes too painful to accept. So we may tell ourselves that a company isn’t performing that badly, or that a business isn’t in trouble when facts point to the opposite. For investors, this denial can be costly.

Let’s say we buy into a company because it promises high growth. But over time, red flags emerge and several things go wrong. Poor earnings, weak management, shifting policies and/or market trends. But we refuse to let go of that investment, holding on because we are emotionally tied to it, and because we don’t want to admit we made a wrong choice. Admitting to our mistakes hurts us. We live in denial, and end up losing money. (Which hurts even more!)

So how can we avoid falling into this pain-avoiding denial trap?

• Remember your why: Go back to the rationale behind why we invested in a company in the first place. If things go south with the investment, we should go back to “why” we invested and re-evaluate the fundamentals. Has the company lost its competitive advantage? Is there a problem in management? If things don’t align, it may be time to rethink the investment altogether.
• Don’t get emotionally attached: This comes up time and again in all of Munger’s list of human tendencies, and advice: Avoid falling in love with a business or company. Remember, we should not be loyal to businesses, but to their performance. If the numbers and data tell a different story, let go.
• Get comfortable with discomfort: Acknowledging that not everything will go according to plan is a healthy way to go about things as an investor.  Acceptance doesn’t mean defeat—it simply allows us to move ahead with clarity and profit in the long-term.

It’s okay to admit that we made a mistake. Ultimately, investors who can face hard truths and take corrective action early are the ones who protect, and grow, their wealth over time.