16 Mental Models, Biases, and Maxims to Improve your Investing

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1. Tendency to want to do something

Participants were told to sit in a room for 45 minutes and do absolutely nothing. All they had was a button in front of them that would electrocute them on pressing it. Over 80% of participants chose to electrocute themselves at least once. 

Humans have this insatiable desire to avoid boredom and take action, even if it is to their detriment. 

Investing: Stop touching your portfolio, stop over trading, stop intraday trading. 

“Don’t just do something, sit there” – Thich Nhat Hanh

2. Survivorship bias

History only remembers the winners. We do not know about the lottery ticket holders that didn’t win. 

We over-attribute success to the things done by the successful agent rather than to randomness or luck.

Investing: Stop trying to copy other investors. The vast majority have just been lucky. 

3. Occam’s razor

Simplicity trumps complexity. The most famous mathematical formulas are simple and elegant (E=MC²).

The best solution has the fewest moving parts. 

Investing: Don’t overcomplicate the stock-picking process. Use just a few, easy to follow rules. Use a model.

4. Leverage

In engineering, by applying a small amount of input force we can make a great output force through leverage. Think: The Pyramids.

Use your knowledge and specific skill set to apply leverage to a situation. It will bring you leagues above others.

Investing: Leverage your knowledge of quantitative/algorithmic investing (Whether from Aikido or some other place). Seriously 99% of people don’t invest using systems or data. You have a superpower.

“Give me a lever long enough and I shall move the world” – Archimedes

5. Evolution: Natural Selection & Extinction

Those not adapted to deal with a new environment become extinct. 

All the gamblers in the market will become extinct eventually. I know it can be frustrating looking at people winning big from buying DOGE. But just hang tight. Continue to use a scientific approach to investing. I promise you, it’s far better.

Investing: Use investment strategies which have performed well throughout the long term. Pay particular attention to max drawdown, Sharpe ratio, and Base rates. Stick to your guns during tough times and don’t be tempted to act irrationally. Check out these long-term investment strategies.

“The best investment strategy is the one you can stick with” – Wesley Grey

6. First-conclusion bias / Sunk cost fallacy / Availability heuristic

After getting our first idea, the mind tends to shut down. This bias is related to sunk-cost fallacy, whereby we have put so much effort into an idea that we refuse to accept it could be wrong.

This is why I don’t pick stocks anymore, I let the computer do that for me. I know that I am highly likely to be biased after pouring 10 hours into researching a stock that I’m interested in.

Investing: Don’t pick stocks. Use an algorithm / model instead.

7. Tendency to overgeneralize from small samples

This is related to the Barking Dog in the Window bias; a dog barks at someone walking by outside, because they continue walking and eventually disappear, the dog think that it is because of their barking that it happened. 

Generalization is an important part of being human – we can’t wait until we have all the data to act (think 80/20 rule).

However we must be aware of the pitfalls too. Make sure your sample size is big enough. Make sure that the outcome is truly caused by the event.

Investing: Beware of using your own recent investing success as the sample to learn from. You must look at many different strategies and learn from larger pools of data.

8. Influence of stress / Breaking points / Fight or flight

This is related to the Barking Dog in the Window bias; a dog barks at someone walking by outside, because they continue walking and eventually disappear, Stress can cause irrational, poorly-thought-through decisions. Think “System 2 Thinking” by Daniel Kahneman. 

When going through emotionally difficult situations, keep your thinking hat on, heart rate low, and don’t act. Just wait. 

Investing: When the market goes down suddenly, don’t act immediately.

If value investor Guy Spier buys a stock and it goes down immediately, he won’t sell it for 2 years. This means think hard before buying and don’t get swayed by outside forces. Before buying a stock – Guy imagines that the stock drops by 50%

9. Failure to account for base rates

All of us unconsciously fail to look at the past odds when determining current or planned behaviour.

What are most investors doing right now? Buying vastly overvalued stocks.

What do we know to be true from history? The most overvalued 10% of stocks have averaged 5% per year since 1965. Whereas the most undervalued 10% of stocks have averaged 16% per year since 1965.

Investing: Deeply examine how you are investing. Is it in line with what works over the long term? Here are 10 long term strategies you can easily implement.

10. Tendency to feel envy & jealousy

This is deeply ingrained in our DNA. It is what makes us strive for better.

Beware of this tendency when others are winning through luck, not skill.

Investing: Don’t be jealous of the Dogecoin gambler winning big. Using a model/strict methodology tends to remove these emotions as you are following the algorithm like they are your money manager.

11. Regression to the mean

In a normally distributed system, long deviations from the average tend to return to that average.

Investing: If your time-tested investment strategy isn’t going your way for a while – hold fast, it will eventually. Conversely, in the good times prepare for the worst.

12. Randomness / Hindsight bias

Much of what we experience in the world is indeed random, and cannot be predicted. 

As Nasim Taleb would say, we are frequently “Fooled by randomness”. We attribute to cause what was in fact a completely unpredictable outcome.

Investing: Beware of any investing success. Constantly be a sceptic of high returns. Use investing strategies that have been rigorously tested across many different universes/data-sets.

13. Contrarianism

To have a different outcome from everyone else, we must by definition act differently from everyone else.

Investing: To achieve higher than average returns, you must use a  different technique from everyone else.

14. Consistency / The compound effect

In relation to habits, a 1% improvement per day yields a 37X improvement in a year (Think languages/instruments). The consistency of doing the habit everyday, combined with the compound effect leads to incredible results.

The reason Warren Buffett is famous is because he has been so tremendously consistent. He has been investing using a methodical approach for over 50 years. Not doing anything radical. Just keeping up the routine.

Consistency is everything.

Investing: Invest a set amount every month until you retire.

15. Discount rate / Margin of safety

If an engineer is designing a bridge and knows that the heaviest vehicle will be 10 tonnes, he will not build the bridge to only support 10 tonnes; he’s going to give himself a wide margin of safety. He doesn’t want a collapsed bridge on his hands. 

We must always discount our predictions and actions to account for disaster or unexpected behaviour.

Investing: The value investor will discount whatever price he has estimated a stock to be intrinsically worth.

16. Loss aversion

Being wrong feels worse than being right feels good. This is another bias made famous by Daniel Kahneman. 

The solution? Avoid being wrong. Stop making mistakes.

Investing: Use long-term investment strategies. Avoid losing money.


If you’re interested in using algorithms / models to improve your investing, you might be interested in Aikido Finance. We have a catalog of quantitative investment strategies, backtested over 20 years – so you can see what works in the long term.

Until next,


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