Becoming a Better Investor: The Doubt Avoidance Tendency

In Poor Charlie’s Almanack, legendary investor Charlie Munger outlines 25 psychological tendencies that shape our thinking and decision-making—insights that apply not just to life but also to investing. By understanding these biases, we can avoid common pitfalls and make more rational, well-informed investment choices.

This week, we’re diving into the fourth tendency on Munger’s list: the Doubt Avoidance Tendency, and how it impacts investing.

What is it?

The Oxford English dictionary defines doubt as “a feeling of being uncertain about something or not believing something.” Which means that when we doubt something, we question it, consider it unlikely, and hesitate to believe it or believe in it. 

Munger says humans are programmed to “avoid” doubt by reaching a conclusion quickly, and he illustrates this with the example of animals and evolution. He states, “After all, the one thing that is surely counterproductive for a prey animal that is threatened by a predator is to take a long time in deciding what to do. And so man’s Doubt Avoidance Tendency is quite consistent with the history of his ancient, nonhuman ancestors.”

The name says it all—our minds naturally try to escape uncertainty by rushing to conclusions. While this can be useful in some situations, it often works against us, leading to hasty decisions that aren’t always in our best interest.

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

This bias creeps in when we are unsure of what to do.The Doubt-Avoidance Tendency highlights how we, as humans, dislike uncertainty. But the very nature of investing in the stock market comes with uncertainties. And through the Doubt Avoidance Tendency, we try to remove our doubt by quickly making a decision.

We may make sudden ill-informed decisions, like hastily investing  in a stock before doing our due diligence, or, avoid investing altogether because we don’t like the uncertainty that comes with it.

But here’s the deal: unlike prey and predators in the wild, our investing decisions don’t require an automatic fight-or-flight response. We shouldn’t make instant decisions when it comes to investing, because doing so can be detrimental to our financial well-being. Here’s how to approach that feeling of doubt instead.

• Be patient: Instead of rushing to conclusions, allow yourself to sit with the uncertainty and explore multiple scenarios.
• Seek opposing views and evidence: If you’ve zeroed-in on an investment and feel too easily convinced, challenge your assumptions by looking for reasons why it might fail. This prevents overconfidence and encourages a more balanced perspective.
• Build structure: Yes, you should build your portfolio, but build a structured decision-making approach around it. Do your research, have a checklist in place, consult multiple sources before putting your money down.
• Always keep learning: Learning about the trends and happenings in the market is crucial. The most successful investors are malleable who continuously learn and adapt: they know that doubt isn’t something to avoid, rather it’s something that pushes one to think critically and objectively. By resisting the urge to make an immediate decision, we can make more rational, well-informed investment choices.

Yes, doubt is uncomfortable. But we need to learn how to navigate that discomfort and learn more about a stock or situation instead of rushing to make a decision in order to free ourselves from doubt. As investors, this can lead to impulsive buying and selling without focusing on the fundamentals or doing a proper analysis.

So instead of rushing to do something or anything, it’s best to embrace that sense of doubt, give ourselves time to fully understand things, and then make a smart investment decision.

Sources

https://www.investec.com/en_za/focus/investing/investing-avoid-these-five-cognitive-biases.html

https://fs.blog/great-talks/psychology-human-misjudgment