Becoming a Better Investor: Inconsistency-Avoidance Tendency

In Poor Charlie’s Almanack, legendary investor Charlie Munger highlights 25 psychological tendencies that influence how we think and make decisions—insights that are just as relevant to investing as they are to everyday life. Recognising these biases can help us sidestep common mistakes and make more rational, informed investment choices.

This week, we’re exploring the fifth tendency on Munger’s list, the Inconsistency-Avoidance Tendency, and how it affects investing decisions.

What is it?

This tendency, in Munger’s words, can also be called the “anti-change” tendency of the brain. We resist changing our beliefs, decisions, or actions, even when faced with facts that suggest we might be wrong. It is based on the idea that once we commit to a particular thought, idea, or course of action, we feel uncomfortable with the idea of admitting we made a mistake, or that we need to change — because that change is “inconsistent” with the belief we formed.

This discomfort leads to the avoidance of inconsistency, even if it costs us. Says Munger, “The brain of man conserves programming space by being reluctant to change, which is a form of inconsistency avoidance.” It’s easier to continue down the same path, even if it harms us, than admit we were wrong.

It’s human nature. Our brains like order and stability. When we take a decision or stick to a certain belief, it becomes a sort of foundation/standard operating procedure — and we move forward from there. So changing that belief, especially after we’ve taken decisions or actions based on it, can feel chaotic and unstable. This is the reason why some of us justify a bad decision — even something as simple as ordering a bad dish at a restaurant and convincing ourselves that it tastes good.

How does this tendency play out in the world of investing?

Well — refusing to see the flaws in a stock or investment, and refusing to let go of it!

We’ve spoken about how we shouldn’t fall in love with a stock. We should be objective and look at the fundamentals when investing. When the Inconsistency-Avoidance Tendency creeps in, all that objectivity goes out the window.

We buy a particular company with certain analyses and judgment. But soon, that company does not turn out to be as perceived. It struggles. There is multiple evidence of negative factors that emerge. It doesn’t look like it’s going to bounce back. In other words — it was a bad investment. Instead of admitting we made a mistake and selling the position to cut our losses, we hold on to it, hoping it will correct, too adamant to admit it was a wrong move. Why? We don’t want to change our belief in the company. We believed it was a good investment and we don’t want to change that view to “it was a bad investment,” because it’s inconsistent in our minds.

So how do we deal with this tendency in investing?

• Accept it: Recognising the Inconsistency Avoidance Tendency is the first step in overcoming it. Once we “get comfortable with the discomfort” of changing our mind and admitting the mistake, we’re in a better position to rectify things.
• Revisit and re-evaluate: Investing for the long-term is good, but we also need to check in and re-evaluate our investments on a timely basis. Look at stocks and investments critically and rationally and see if they are still worth holding on to.
• Always keep learning: The only way to grow as an investor (and to grow your investment portfolio) is to seek out new information and stay up to date. Have the fundamentals changed? Are there new developments or policies that could have an impact? Keep learning and adjust your investment strategy.
• Drop the ego: We all make mistakes and invest in companies that didn’t work out as we expected. Making mistakes and being wrong/making a wrong investment is part of the investor’s journey. Instead of refusing to acknowledge your mistakes, learn from them, and focus on long-term growth.

No one is right 100% of the time. So get comfortable with being wrong and treat it as a learning opportunity. Munger himself has often said that the key to avoiding mistakes is the ability to recognise when you are wrong and quickly adjust. Embracing this mindset will make it easier to handle inconsistency and make better decisions.