Editor’s Note: In today’s article, Dr. Joel F. Wade discusses how understanding – and acknowledging – your temperament can help you avoid expensive mistakes.
One such mistake would be missing out on the opportunity Alexander Green discovered… This little-known company only recently went public and is already taking in tens of millions of dollars…
Trading for well under $10, this stock could be your ticket to major gains in 2022.
– Madeline St.Clair, Assistant Managing Editor
Warren Buffett has said, “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
Temperament includes the qualities of extroversion and introversion.
Understanding where we fall on this continuum can affect what we focus on, and that can influence how we invest (and can help us to avoid expensive mistakes).
When we’re striving for mastery of investing – or mastery of anything, for that matter – knowing ourselves is essential.
Within our own minds, there is much that we simply take for granted: “This is just the way it is for me.”
Most of our regular habits and tastes are more or less automatic. That’s the function of a habit. It’s an established behavior – that hopefully is good for us – that we don’t have to spend energy thinking about.
So it’s worth making a special effort from time to time to reflect on our habits, our routines, and how our temperament, beliefs and personality affect our decisions and effectiveness in the world.
Are you more extroverted or more introverted?
If you’re drawn to group activities, energized by being with people and excited by big opportunities, you’re likely more extroverted.
If you prefer one-on-one interactions with people, do your best work on your own, feel drained by social gatherings, and feel recharged and happy with solitude, you’re likely more introverted.
Extroverts tend to feel happier in general than introverts, in part because they tend to interact with other people more, which in itself is usually more fun.
They also tend to have more of an external focus and take more overt action – both of which provide a buffer from the kind of self-absorption and rumination that can lead to lowered mood or depression.
But here’s the downside: Extroverts are more reward-sensitive, which means that if we’re more extroverted the kind of excitement we feel when we think we could make a big gain in our investments can also blind us to the potential warning signs.
That means we might hold on to a bad investment for too long, believing that it has to go up more.
We can also get drawn into investments that are too good to be true or get caught up in “deal fever” – putting more money on the table to reach a deal when we should be pulling back.
That’s what happened at the end of 2003 when shareholders in the AOL-Time Warner merger lost $200 billion.
The promise of reward is just too seductive to risk giving it up for some boring research or cautious reflection that could crush that delightful buzz.
Meanwhile, when we’re more introverted, we tend to focus much more on risk: Extroverts are more reward-sensitive; introverts are more threat-sensitive.
Understanding Your Temperament
When we’re more threat-sensitive, we tend to weigh our judgment more heavily toward the potential downsides of any endeavor. We tend to see the negatives of a situation. We hold back until we’re absolutely sure that everything is going to be okay.
While this is a great antidote to the dangers of being overly reward-sensitive, the danger here is that we won’t act when the time is right.
Life is full of trade-offs, and balancing potential risks against potential rewards is central to deciding which actions are worth the risk and which are not.
The risk for an introvert, therefore, is the quieter – but significant – risk of the opportunity not seized.
Neither extroversion nor introversion is the “right” temperament to have.
Each has its upsides and downsides. What’s important is to know your temperament – and decide what you want to do about it.
If you know that you’re more extroverted and therefore reward-sensitive, use that knowledge to do a real risk assessment against the excess of enthusiasm. If you know you’re more threat-sensitive, use that knowledge to do a real opportunity assessment and look clearly at the risk of not diving in.
Master your own temperament by first acknowledging and accepting it.
Get familiar with what you’re naturally drawn to on an immediate-impulse level from your temperament. Then decide, from your deeper values, which decision you’ll feel proud of and good about later.
This is what will help you to control the urges that get other people into trouble investing.