Behavior: We Do Not Change Easily
■Inertia
Inertia refers to the tendency to maintain the current state rather than change it.
Even when change could be a better option, we tend to choose what feels familiar.
In Japan, interest rates on savings are almost nonexistent, so saving money is not usually done for the purpose of earning interest. However, when I was living in Korea, interest rates were relatively high, and I did save money in fixed deposits. At the time, various banks offered a wide range of savings products, many of which had higher interest rates than the bank I was using.
Even so, I usually kept my existing deposits because canceling or transferring them felt like a hassle. Although I was aware that I was losing money due to the interest rate difference, choosing to do nothing felt psychologically more comfortable.
This can be seen as an example of the inertia effect, in which the desire to maintain the current state outweighs the judgment that it involves a loss.
■Planning Fallacy
People tend to underestimate the time and effort required to complete a task.
As a result, they believe that “this time will be different,” yet the outcome is often the same.
During stock investing, I once experienced a loss of about 20% in a single position. Objectively, I should have considered risk management to recover from the loss, but since the investment amount was not large, I optimistically judged that this level of loss could be recovered relatively quickly and left the position unchanged.
I was also aware, at least numerically, that recovering a 20% loss requires a 25% gain rather than 20%. However, in practice, I did not fully feel the burden of this and kept the position in a loss state for several months.
This can be seen as an example of the planning fallacy, arising from underestimating the time and rate of return required for loss recovery and from overly optimistic expectations about future conditions.
■Sunk Cost
The sunk cost effect describes the tendency to continue a course of action because of time, money, or effort already invested, even when we know it is a poor decision.
Past costs end up constraining present judgment.
One of the things many people find most difficult in stock investing may be cutting their losses. Even when losses occur as the stock price continues to fall, people often struggle to decide to sell because they feel that the money and time already invested would be wasted. Selling at that point feels like admitting that their judgment so far was wrong, which leads them to hesitate and keep holding onto the losing stock.
As the desire to recover losses grows, further price declines can lead to the decision, “Since I have already lost this much, I might as well buy more and lower my average cost.” In this process, the basis of the investment decision shifts away from future expected returns and instead becomes driven by the emotional urge to undo losses that have already occurred.
■Decoy Effect
When an additional option is introduced, a choice we previously hesitated over can suddenly appear more attractive.
Simply changing the basis of comparison can easily influence our behavior.
Let us assume that financial products sold by banks or securities firms are structured as follows.
・Basic plan: limited investment scope, low fees
・Standard plan: high degree of investment flexibility, mid-range fees
・Premium plan: almost the same level of investment flexibility as the standard plan, but with higher fees
Compared to the standard plan, the premium plan offers no clear additional benefits and only charges higher fees, which means it has little real value as a choice. Nevertheless, the mere existence of this option makes the standard plan feel like a relatively reasonable and well-balanced choice.
This can be seen as a typical example of the decoy effect, in which decision-making is influenced not by the absolute level of prices or features, but by their relative position. Rather than presenting an extremely poor option, a deliberately slightly inferior option is introduced as a comparison point, subtly guiding the choice.
Emotion: We Judge After We Feel
■Loss Aversion
People experience the emotional pain of losses more strongly than the pleasure of gains of the same size.
As a result, they tend to focus more on avoiding losses than on obtaining gains.
Around me, there seem to be more people who choose to keep their money in cash savings to avoid short-term losses than people who actively invest. Especially in Japan, where bank deposit interest rates are almost nonexistent, saving through deposits for the purpose of generating returns is realistically of little significance. While the principal may be preserved in the short term, over the long run people often pass time without fully realizing the loss caused by inflation and the associated opportunity cost.
Of course, investing involves the possibility of losses. However, with a basic level of financial knowledge and long-term, consistent investment in diversified assets, those risks can be managed within a reasonable range. Ultimately, I felt that what is needed is a perspective that views time and capital from a long-term standpoint rather than focusing on short-term fluctuations.
■Anchoring Effect
The first piece of information or number we encounter becomes a reference point for later judgments.
Even if that anchor is not rational, our feelings tend to remain tied to it.
When investing in stocks, people often set inappropriate reference points due to the anchoring effect. For example, the initial purchase price may become the benchmark for recovering losses, or a past peak price may be perceived as a target price.
This kind of judgment arises because the first number encountered becomes fixed as a reference point, rather than decisions being based on the market or a company’s intrinsic value, or the current market environment. As a result, even when new information emerges, investors find it difficult to move away from the reference point formed by the anchoring effect.
■Mental Accounting
People do not view money or resources objectively as a single whole, but instead mentally separate them into different accounts.
As a result, the same amount can feel very different depending on its source or intended use.
At one point, I started short-term stock trading using money I had saved from my salary, and over a relatively short period of time, I managed to earn quite a large profit. My plan at the time was to steadily build up my investment principal from my monthly salary, and to either reinvest the profits from short-term trading or set aside part of them as cash savings.
However, my actual behavior differed from that plan. The money I set aside each month from my salary felt extremely precious, month by month. In contrast, the money earned from short-term stock trading was perceived as money that came easily. As a result, unlike my salary, I ended up spending my investment profits without much hesitation.
I have since stopped this kind of spending. While I sometimes regret the money I already spent, I see it as an experience that allowed me to personally feel how the same amount of money can be perceived and used in completely different ways depending on its source—an example of mental accounting in practice.
■Confirmation Bias
People tend to accept information that aligns with their existing beliefs while ignoring information that contradicts them.
Once formed, emotions and judgments reinforce themselves and become increasingly fixed.
Confirmation bias is most clearly observed when investors selectively accept information that supports the stocks they already hold. They tend to focus on positive articles and optimistic outlooks, while dismissing information that points to deteriorating performance or structural risks as temporary issues and quickly moving past them.
The same tendency appears in investment communities. Investors often refer only to opinions that align with their own, while excluding opposing views by labeling those investors as uninformed or unreliable. As a result, they repeatedly collect information that reinforces their existing beliefs, lose exposure to diverse perspectives, and fail to sufficiently examine the possibility that their judgment may be wrong.
■Hedonic Adaptation
Whether an experience is good or bad, our emotions gradually become accustomed to it over time.
As a result, even better choices do not lead to lasting satisfaction.
When I first started investing and earned a profit for the first time, the joy came not from the size of the amount but from the fact that I had made a profit at all. Later, when I achieved relatively larger gains, I certainly felt a strong sense of accomplishment. However, as time passed, similar levels of returns and profits no longer brought me the same level of satisfaction as before.
At first, I thought an annual return of around 4% was more than sufficient. Gradually, however, I began to desire higher expected returns, and in that process, I started allocating part of my capital not only to stable investments but also to higher-risk assets.
Through this experience, I came to realize that hedonic adaptation can serve as a driving force that pushes one to seek greater returns, but if not properly controlled, it can also lead to the pursuit of increasingly intense stimulation and higher levels of risk.
Time: We Constantly Betray Our Future Selves
■Present Bias
People place greater value on immediate satisfaction than on future rewards.
As a result, even when they know a choice would be better in the long run, they tend to repeat decisions that favor the present.
Around me, there are quite a few people who know that they should invest, yet continue to postpone it. The Japanese government has implemented systems such as NISA to encourage individual investment, and personally, I believe that under the current conditions in Japan, investing has become almost essential for individuals.
When I talk about investing with people I know, I often hear things like, “I know I should start, but I still haven’t opened a brokerage account,” or “NISA looks complicated, so I don’t know how to begin.” I also frequently see people delaying investment by saying that the global market is unstable right now and that it does not seem like the right time to invest.
This kind of behavior can be seen as a result of present bias, in which the desire to avoid immediate anxiety and stress outweighs concerns about potential losses that may occur in the long term.
■Hyperbolic Discounting
As a reward becomes closer in time, its perceived value increases sharply, while rewards further away are heavily discounted.
This leads us to underestimate future benefits and overvalue immediate rewards.
Many people may have experienced setting a long-term plan to save or invest a fixed amount each month for the future, only to see it gradually fall apart after a few months. At first, the plan clearly seems rational, but when it comes time to put it into action, people often postpone it with thoughts like, “This month has more events than expected and expenses are higher than usual, so I’ll start next month.”
The choice to save or invest for one’s future self is based on outcomes that lie far ahead. However, as that future draws closer to the present, decisions can shift in irrational ways depending on the situation. This can be seen as a classic example of the hyperbolic discounting model, in which the evaluation of rewards changes as the time to receive them approaches.
■Delay Discounting
As rewards are delayed, the psychological cost of waiting increases, sharply reducing the attractiveness of the choice.
As a result, people tend to give up easily on rewards they cannot receive immediately.
Delay discounting can be described as a behavioral tendency to instinctively avoid choices in which rewards are received later. Even though people understand that ETFs or diversified investments are more advantageous in the long run, they are often more drawn to short-term trading that produces immediate, visible results. Similarly, some start regular, installment-based investing but give up because there is no noticeable change. Preferring immediate cash realization over dividends or compounding—such as using dividends right away instead of reinvesting them—is also an example of delay discounting.
I, too, went through a period when I preferred short-term outcomes over waiting for delayed rewards. However, I now invest through automatic monthly transfers into a long-term investment account and limit how often I check the account to just a few times a year. Long-term investing can certainly feel boring, but I have once again come to realize that enduring this boredom is at the core of building wealth.
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