Saturday, January 12, 2008

Behavioral Finance - Consistency and Commitment Tendency

This is the fourth in a series of posts about common human misjudgments. The series is based on a Charlie Munger speech at the Harvard Law School in 1995.

Why study human behavior in relation to finances?
Recognizing and understanding why people do the things they do, what drives them, and what are innately human tendencies is the first step in overcoming your own self and making sound decisions! We want to make rational, logical decisions, but emotions and irrational tendencies get in the way.

4. Consistency and Commitment Tendency
People will hang on to past beliefs and reinforce those beliefs by repeating them even in the presence of contradictory evidence.

Once an idea gets in to the human mind and gets reinforced by making public statements, the brain has a tendency to shut off and allow no other disconfirming information in. It seems that when a public disclosure is made, you are committing to it and essentially pounding it into your own head. It takes a lot to break through and sever that commitment.

For instance, many of the protestors that we see on TV or at city hall that are out there screaming at us, aren't convincing us or changing our minds, but they are forming mental change for themselves.

An interesting take away from this is:
what you think
may change what you do,
but perhaps even more important,
what you do
will change what you think

You have probably heard that thinking negatively or always being gloomy seems to keep one in a downward cycle. The negativity feeds more negativity. To bring about change, it can be as easy as changing your thoughts. You can control your own mind. Practice taking control. With practice, it will get easier. Thinking good thoughts can change your attitude and lead to good actions.

Whenever you catch yourself making negative statements or thinking negative thoughts - push out the negativity, squash it and redirect your mind to more creative and constructive thoughts.

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