The Surprising Thing About Investing You Can Learn From Talent Shows On Television

If you have seen any talent shows, you may have realised that some who turn up for the auditions are really, really, bad.

Yet, many of those bad contestants appear to be genuinely shocked when the judges break the news to them that they are really lousy at what they do.

Put another way, it’d appear that the contestants are sincere in thinking that they are good at something despite how obvious it is to the rest of us that the truth runs contrary to the perceptions of the contestants.

This isn’t surprising news if you’ve been watching talent shows for a while. But, it’s still very interesting. How can some people be so blind to the truth and believe all their lives that they are great singers (or performers) when they are clearly not?

The question you see just above isn’t applied to just delusional singer-wannabes.

Most drivers feel that they are above average drivers.

Most entrepreneurs think they can create the next billion dollar company when in fact, most new businesses fail within their first five years of existence.

And as an investor, this topic is close to my heart: Most investors in Singapore think they can out-perform Singapore’s stock market as measured by the  Straits Times Index (SGX: ^STI).

Logically, it is simply not possible at all for all drivers to be better than average, just as it’s not possible for all entrepreneurs to be successful when most startups fail. It applies to investing too – you can’t have each and every investor beating the market because the market is, quite simply, made up by all investors.

We have to be aware of this bias toward overconfidence in our own abilities whenever we invest. That is why it’s important for us to be diversified.

While we may feel that a certain company is destined for greatness and that we are the relative few who are smart enough to see it before the rest, we’d still have to stay humble enough to understand that we may be wrong and it’s better to spread our bets than to concentrate on just that one single golden goose.

Foolish Summary

Overconfidence is just one of the many congitive biases we have that’s inbuilt into our psychological make-up. Investing is not just about understanding the companies we invest in; it’s also about understanding our very human psychological failings.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.