With the extreme market volatility and emotional turmoil caused by the COVID-19 pandemic, it’s understandable that investors are concerned about their investments. According to Nomi Bodlani, head of strategic markets at Allan Gray, investors may fall prey to “hot thinking”, to the detriment of their investments.
Behavioural scientists refer to a certain type of thinking that happens under stress as “hot thinking”, and it is this inclination that leads people to react defensively. “While hot thinking can help us act swiftly and automatically when we are in real and imminent danger, or performing routine tasks, it can lead to biased judgement and irrational decision-making outside of these circumstances,” Bodlani mentions.
Bodlani references Morgan Housel, a partner at the US venture capital firm Collaborative Fund, who summed it up succinctly at the Allan Gray Investment Summit a few years ago, saying: “Volatility is not the biggest risk in investing. The biggest risk is the action that you take in response to that volatility. You think it is going to make you safe, but it actually injects substantially more risk into your investment portfolio.”
Bodlani further advises that it is important for clients to first understand some of the features and responses of hot thinking. This will ensure that investors may be able to think through their decisions more deliberately and ensure a better long-term outcome.
This is a good thinking model to work through and share with your clients.