kEEPING IT SImPlE ISN’T STUPIdrelationship between two variables, when in reality, there is little or no
relationship between the variables. One example that cost many inves-
tors money was the correlation between technology stocks in the 1990s
and guaranteed profits. These thoughts got anchored in the minds of
many.
“Hot cognition” is a newer term for certain types of cognitive biases.
This type of bias is based on the mood of the person making decisions.
Someone in a heightened state of emotion, such as anger, fear, and even
joy, can make errors in judgment based on his or her emotional state.
In the case of hot cognition, a person may make a decision too quickly,
without the proper amount of reflection.
“Cold cognition” is also a relatively new type of cognitive bias. It is
the complementary cognitive bias of hot cognition. Just as hot cogni-
tion describes decision making affected by heightened emotional states,
cold cognition occurs when a person makes a decision while experienc-
ing very little emotion. This type of low-energy and attention decision-
making is also problematic. Instead of making decisions too fast and
while emotionally charged, a person experiencing cold cognition makes
decisions based on little reflection because of lack of interest.
It turns out, Frank, my prospective client, was in a state of mental fa-
tigue caused by twelve years of dealing with all of the above.
To use the fifty-dollar word, Frank was stuck in “illusory correlation”
believing that money in the market was the same as money in the bank
or in an annuity. Not so. In his mind, “stocks always make 10%” and
“always come back” after a fall. He got used to the “old normal.”
WelCoMe to the neW noRMAlWill investors ever return to the ‘hey’ days of the 1990s and recoup the
money they lost, of the past twelve years? They may recoup the dollars,
but they will never recoup the time.
So far, the 21st Century has not been kind to stock market investors.
Baby boomers who experienced the thrills of the 1980s and 1990s have
been hit hard. Their retirement dreams were built on the expectations of
“conservative” yields in the eight to ten percent range and bond yields
of six and seven percent. Didn’t happen.