Dadar Local, Pavlov’s Dogs and Investors

Mumbai’s Dadar Local Train Station presents a unique picture of human behavior. Over 20% of the 7.5 Mn daily local train commuters originate from or come to Dadar everyday leading to amazing scenes during peak morning and evening hours. 

Dadar station is a transit point for commuters along western and central lines.

Commuters often joke about not having to move either boarding and alighting the train as the crowd pushes you ahead anyways. This is understandable given the massive crowds waiting to board or alight the train during peak hours.

The interesting observation however is what happens during non-peak hours when trains are relatively light in terms of traffic and can be boarded without pushing.

Well the scene is exactly the same-you still get pushed.

This amazing conditioning is a results of years of experience and hardships that commuters face at the station and the herd mentality that disables independent assessment of space inside the train and makes everyone push hard irrespective.

Pavlov’s Dog’s had developed a similar conditioning of rewards and punishment. They would salivate as soon as an assistant would enter the room in the expectation of food.

Salivation, Pavlov noted, is a reflexive process. It occurs automatically in response to a specific stimulus and is not under conscious control. However, Pavlov noted that the dogs would often begin salivating in the absence of food and smell. He quickly realized that this salivary response was not due to an automatic, physiological process but was a learned behavior.

We, the Investors

Imagining arbitrary linkages is a common human behavior. We all know of that one friend who would study in one specific location because of the belief that studying at that location helps get better grades.

Its’ illogical and arbitrary, however, that’s classic human behavior for you.

Newspaper headlines declaring phenomenal returns, a neighbor, a friend or a relative making a killing in the markets initiates the “salivation” conditioning.

This gives rise to irrational behavior.

Knowing fully well that high returns in previous short/medium-term period is actually a pre-cursor to lower near/mid-term future returns, investors still go ahead and take investing decisions losing their shirt in the bargain.

Of-course often investors rationalize by telling all and sundry that we are long-term investors and understood the risk very well before investing and don’t mind losing some money as we have confidence in the long-term story-so on and so forth.

“When markets correct, people are left feeling like Pavlov’s dogs; wondering why the meal which was promised did not follow”.

Exuberance and Panic

Often investors come all guns blazing ready to invest at the end of a terrific year or increasing allocation to the best performing asset-class and panic when the market goes down.

Often such investors’ stay invested hoping for recovery till its too late as they have lost a lot and then they not only exit just as market is readying to recover, but even are scared, for a long-time to return.

Psychologists describe this as fallout of the negative memories triggered by the brain during times of stress as also the inability to exit till original investment has been recovered.

Follow the Course

As the legendary investor John Bogle said “Follow the course”-The best way to protect against irrational exuberance and panic.

However for that to happen you got to have “THE COURSE”.

Taking help of a qualified advisor, creating a plan and staying on it through a well-thought out “asset-allocation” approach is key to investing success.

Following random tips, chasing best performance and returns, trying to time the markets on the other-hand are distractions that one needs to avoid

One thought on “Dadar Local, Pavlov’s Dogs and Investors

  1. Excellent match of human behavior in times of financial investment. It’s said no one can time the market except the manager who carefully chose the tracks of investment. Are the advisors properly trained to guide? The problem is the communication to the investors as once the option to move out is suggested during a rally or making a target return, investors still get feeling to stay invested for more returns.

    Like

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