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Illusory Superiority

Illusory Superiority.

i. a term that you can throw around at the next family gathering to make yourself paradoxically sound pretty smart.

ii. a potentially dangerous cognitive bias in our finances. 

Nestled within the field of social psychology, illusory superiority happens when someone overestimates their own abilities in relation to the same abilities of others. 

I was reminded of it myself recently when reading The Family Board Meeting - I thought of myself as an above-average father, and was reminded I may have started to coast a bit. (More on that below)

When talking about money - this manifests itself a lot. A few examples from real-world encounters in my career:

I know that this company stock is going up - I've seen the products at my job firsthand.

I know the market is going to crash again, let's wait to get in. 

I'm not going to die. 

I'm an above average driver. 

I know that I'll get that promotion next year. 


This bias is somewhat natural for most of us - and eliminating it altogether might be too much to ask for.

So what to do? Be humble. 

Even as a financial advisor, I ask others for input in our own finances. I realize I have blind spots - and as much as I don't want to put that into words, it's true.

Illusory superiority is very real - and can be very dangerous in making financial, and other life, decisions. But it can be addressed by a simple question: What if I'm wrong?

 
Additional Resources

In light of Monday's massive market selloff, two of the following resources speak to the market directly. While it was certainly an alarming day - the Dow Jones was down 767 points, the 6th largest daily POINT decrease in history, it didn't even crack the top 20 of daily PERCENTAGE decreases. Scary? Yes. Historical? No. Sorry, CNBC. 

1. The Irrelevant Investor - Yuan Redux
Some perspective on the Yuan being devalued (again) - but my favorite lines are these: 

A better answer to “tune out the noise” is to compartmentalize it. It’s okay to be aware of what’s happening today, it’s probably not wise to act on it.

Waiting for the dust to settle is not a strategy that works in the real world. The investing world is always dusty, that’s why people who take risk are usually rewarded.


2. Of Dollars and Data - Even God Couldn't Beat Dollar Cost Averaging
I've included this article before, but am including it again. It's pretty long, but Nick does a great job unpacking a purely hypothetical back-theory of knowing precisely when the market was going to go up or down - and only investing then. Or, "buying the dip" market timing. The conclusion: even with perfect information, the Buy the Dip underperforms dollar-cost-averaging because while you wait for the dip, the market is likely to keep rising and leave you behind. 

3. Jim Sheils - The Family Board Meeting
My friend Taylor sent this to me last week - and I can't recommend it highly enough for anyone with kids in the home. The premise is simple: our kids need us, not just for quantity of time - but the quality of time. Sheils' suggestion is a Family Board Meeting - a one-on-one time with each kid every 90 days for 4 hours at a time. The child should choose a fun activity, and you should have time to just talk afterward. A super simple concept with pretty profound results if done regularly. It struck me hard because since I started Fident, I've worked from home - meaning I see my kids (quantity time) much more than I ever have before. Because of this, I've become less intentional in making quality time with them a priority - subconsciously thinking I was doing ok. Great, great read. 

Bonus. Abnormal Returns - Balancing Today and Tomorrow with Jeremy Walter 
Shameless plug here - but it was an honor to be interviewed by Tadas Viskanta at Ritholtz Wealth Management last week, and featured on their mini-podcast. Tadas read my blog on the topic, and invited me onto the show to talk more about it. (Run time around 10 minutes). 
Where do you struggle with illusory superiority? 

Gratefully,
Jeremy
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