How Perception Shapes Reality

by | Jan 18, 2018 | Investor Behavior

Last week, I read about a Netflix algorithm update that’s changing the way they serve program images to customers. In addition to curating your Netflix feed based on what you’ve previously watched, Netflix will now be showing unique program images that are also based upon your past preferences.

Consider the following example from Thrillist:

“You might see Good Will Hunting pop up in one of your recommended rows (which are also tailored to your viewing habits). If you’ve watched a lot of love stories in the past, you might see an image of Matt Damon and Minnie Driver kissing, whereas if you’re a comedy fan, you’ll likely get a shot of Robin Williams.”

Netflix deeply understands the speed at which we assess information and make decisions. In fact, they’ve realized that, “artwork was not only the biggest influencer to a member’s decision to watch content, but it also constituted over 82% of their focus while browsing Netflix. We also saw that users spent an average of 1.8 seconds considering each title they were presented with while on Netflix.”

By showing different images to different users, Netflix can make the exact same program seem more or less appealing. This speaks to our perception’s ability to shape reality, especially when we’re making quick judgement calls.

Perception also shapes our investment reality.

Whether it’s right or wrong, the simplest measure of investment progress is checking to see if your portfolio is worth more or less than the last time you looked. This simplistic review doesn’t take much longer than selecting a show on Netflix, and invokes the same kind of quick, judgement call.

One factor that can shape our investment reality is the rate at which we seek feedback. It’s statistically certain that those who check their investments more frequently have a higher likelihood of seeing negative results.

As you can see above, by checking your investments quarterly, instead of daily, you increase your odds of seeing a positive result by 14%. The further you go out the spectrum, the better your odds of positive feedback become.

Two investors who experience the exact same investment performance could perceive vastly different realities based on the frequency with which they check they portfolios.

If somebody has the mental fortitude to look at their investments every single day without acting impulsively or affecting their mood, more power to them. However, I don’t think most of us fall into this category. We’re more likely to become slaves to our daily investment update, allowing it to dictate our mood and making us second-guess every position we hold. This habit applies a short-term feedback loop to long term assets, which is a noisy mismatch, prone to misinform.

When we have the ability to control an aspect of investing, we should not surrender it. Unfortunately, that’s precisely what those who look for daily feedback do. On a day-to-day basis, we know the odds of seeing something positive are no better than a coin-flip, but we just can’t pass up the potential dopamine hit. Therefore, the endless cycle of useless, short-term feedback persists. It’s enough to make any investor nuts, even if their portfolio is performing just fine in the long run.

I don’t know what the perfect schedule for checking your investments looks like, but I’m fairly certain it isn’t daily. Just as Netflix can alter the way a program is perceived by changing its imagery, we can alter the way we view our investments by checking them at less frequent intervals. This increases our odds of seeing something positive, provides more useful feedback, and allows us to take back control of our investing reality.

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