Mutual Funds for the Utterly Confused: Are you a Cognitive Miser?
Described as: “A mental characteristic in which the least amount of attention and mental effort needed to process information is used. This concept assumes that humans are limited in their capacity to process information and, therefore, make use of automatic processes (mental shortcuts, formally referred to as cognitive heuristics) that simplify complex problems. In other words, all other things being equal, we are motivated to use relatively effortless and simple mental shortcuts that provide rapid but often inaccurate solutions rather than effortful and complex mental processing that provides delayed but often more accurate solutions.”
I worry about this. This categorization of knowledge to its least common trait - often seen in folks who group people together based on race, may filter over into the world of investing on a grand scale. We may, even after having all of this fundamental and necessary information about mutual funds, investing in them, and using them as part of our retirement plans, see them as something of the same thing.
Each nuance is lost when we do that. Track records of actively managed funds - those that are not linked to an index - are simply a blur of facts and figures and this kind of thinking, this “throwing your hands up approach” or “just toss a dart approach” to investing can lead to a great deal of anxiety down the road when we realize, that not all funds are created - or managed - equally.
Absorb the details. Use your big brain. And realize, as I mentioned at the beginning of chapter eleven, investing is a fluid endeavor, like water, shifts and changes and follows its own path. Only with the right thinking can we follow that path - and without sounding too Zen-like - achieve the investment goals we have set.
It is much harder making the tough choices, the ones based on information than it is to make a blanket choice because your are a cognitive miser.
