Investment Psychology Flashcards
Explain the psyche
The theory uses the Greek word Psyche to refer to the full human mind in its widest sense. It can be translated to mean Mind or soul.
The simple tripartite model of the Psyche we can study makes it up of three parts: Nouse, Logos, Pyr
Relate a narrative and the formation of them to the psyche
Relating the psyche to the formation of narratives: narratives being analogous to Nous (heart) and analyses analogous to Logos (head) – and adding element Pyr(guts), for the amount of light and energy used to create and apply them.
Define Nous
mind, thought or imagination for reality, intuition, reflection and the mind’s eye. It’s the mental picture of the world the individual is using. Considered the most important part of the psyche. A rational mindset implements the mind’s intuition
Define Logos
logic or rational thinking. The function of logos is to condition the mental picture created by Nous. Logos is logic everyone understands - outsiders find logical also
Define Pyr
Pyr - Fire in the belly or impulse and drive. It is the energy used in and by the psyche
Define the ego in the context of investment psychology
An individual sees the world partly the way the world is and partly the way they are. Ego is a lense or filtwer through which a person sees the world. An individual’s Ego can defend them from realities that they don’t like and only the individual can open their eyes to these realities.
What is a healthy ego and an unhealthy ego
A healthy ego means a person sees the world as it really is and constructively tries to engage with the world
An unhealthy ego means a person uses degrees of self-deception to excuse or justify their actions to make themselves feel better about the world - everyone does this, it’s just getting to know to what extent we do it.
When do we hear ego talked about and what does a big ego or small ego mean
In ordinary conversation, individuals can sometimes be distinguished as having a ‘big ego’ or a ‘small ego’, but in investment psychology, the distinction is drawn between ‘healthy’ and ‘unhealthy’ Ego.
If an individual has a ‘big ego’, they have higher self-regard, and a greater sense of self, then they are more liable to ego-defence mechanisms being activated to protect their high self-regard. But it is possible to have a high self-regard and a healthy ego.
Define a rationalisation
When an individual makes a judgment based partly on the way they are and partly on the way the world is, this is referred to as a rationalization
What effects the likelihood and severity of our rationalisations in a situation?
The more emotional we feel in a certain scenario the higher our expectations of a certain outcome
What are ego defence mechanisms and why do they occur?
Ego defence mechanisms are a type of rationalization caused by high emotion and high expectations of something that didn’t happen.
People are often defining themselves by their Ego - the greater sense an individual has of their self regard the more they are influenced by their ego and rationalisations
How do we measure rationality?
Rationality is considered to be a spectrum rather than an absolute. At one end of the spectrum is Logos: dispassionate, neutral reasoning which in theory could be understood by all, while at the other end would be factually incorrect rationalizations, heavily distorted by Ego.
What is the idea of the hill depicting?
Progressively meeting our needs in life is an uphill battle and it is harder to progress than it is to regress.
We ascend the hill according to how much we require of ourselves
“Nothing any good isn’t hard”
What are the challenges people face engaging Nous
Involves opennes, vulnerability, not veiling the truth - uncomfortable situtaion
Individuals ego can fight against self reflection as it wants to feel good
Nous threatens ego defense mechanisms
What are the challenges engaging Logos
Requires discipline, lack of distractions and taking everything in
The capacity to apply Logos is limited by the extent they applied Nous
Ego will always want a less realistic picture of the world
What are the challenges of engaging Pyr
Needs motivation
The ego is typically inclines to risk aversion -risk not fully negaging pyr
Not engaging nous or logos then Pyr can cause problems with impulsive behaviour not thinking realistically
What are challenges engaging the whole psyche?
The conflict between openness, uncertainty and vulnerability of Nous and the stability safety that aid logos
Engaging Pyr conflicts with engaging Nous and applying Logos. Nous requires a degree of disengagement from Pyr. And Logos requires disciplining it.
Person needs a healthy ego
What are the four types of motivation
Positively motivated people
Negatively motivated people
Intrinsic motivation
Extrinsic motivation
Describe intrinsic vs extrinsic motivation
Intrinsic - using your heart
Extrinsic - using your ego
Explain the difference between a narrative and analysis
The analysis is in the narrative- the narrative will dominate and limit the analysis example of the investment manager job being within an outside market narrative. The analysis part is within the context of the world where the investor works
What is a narrative
Big picture - the story
It’s important to note the narrative needs to be deep enough to show the big picture without taking sides. A simple to shallow narrative usually has another simple or shallow narrative contracting it. Shallow narratives can result in persuasive but erroneous speech prevailing over reason and logic
When investing ha=ow can we balance ego and logos
When investing an investor’s Logos needs to be ego-critical to avoid the rationalizations that can arise this Logos needs to be somewhat pessimistic if anything to counteract the EGOs idealized view of the world
Describe the conformist
The individual who does not engage their Psyche beyond their rationalisations, will passively rely on the narratives (Nous) and the analyses (Logos) of others. They can do so by conforming to a variety of norms and ‘accepted wisdom’.
Provides ready-made templates for understanding, coordinating and engaging with the financial markets and they lower the cognitive load of engaging with the world
Become part of the Group-ego.
What are a conformists ethics?
They have some degree of expectation that others give things to them or do thing for them
Only carry out analyses in their narrative, challenging the narrative is too dangerous
Freedom for them is less responsibility
Adapting to the environment
Action and courage tend to be absent - want someone else to do this
