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Bicycle Shed effect in Investing

Posted By: Admin

Friends sometime back I was reading an article in Business world written by Prakash Iyer, a fantastic speaker and thought leader. It struck me how familiar the Bicycle Effect is to investment decisions we make. The Bicycle shed effect is a case to illustrate that we allocate a disproportionately large amount of our time and thinking to trivial and simple decisions, while we do less contemplation on the big decisions due to the little understanding we have or the complexity of the issue involved.

I would urge you to click this link below to read the original article written on the Bicycle effect by Prakash Iyer. http://www.businessworld.in/article/The-Bicycle-Shed-Effect/22-05-2020-192992/ .

Even in the personal investing space, there are decisions that can be classified as complex and those that are relatively simple.

Complex personal investment issues could involve,

  • Administering a Comprehensive Financial plans for your family’s financial needs,
  • Reviewing portfolio to Exit investments that have not performed in line with the expectation,
  • changing the investment strategy based on the market situation,
  • Doing your estate planning ( things to happen in one’s absence), etc..

On the other hand, Simple personal Investment issues could involve,

  • Taking low risk route to investing like Keeping money in bank ( SB account) ;
  • Buying the shares based on tips and news from friends and acquaintances ;
  • Investing larger monies when the stocks markets are doing well & vice versa ;

Simple decisions are like comfort food, they are nice to do, keep you feeling fuzzy, while they are necessary, they are often not the most important decisions in the overall context of your portfolio. Usually these are discrete one time decisions and more short term and tactical in nature. Complex decisions are tough , one needs to devote the mind space, think and contemplate, it is tough on the mind ( especially if your mind is filled with other issues that relate to your office or family). You are forced to think about the negative consequences or outcomes and also prepare a detailed review process that will entail more time / energy to make the task a success. These are more long range plans and the success or failure will also hinge over the long term. These are more strategic and behavioral in nature.

Some of the factors leading to Bicycle shed effect in investing

  1. Lack of knowledge on comprehensive financial needs planning;
  2. Unwilling to devote more time, so no holistic plan is possible;
  3. Not willing to commit plan to paper, so that large strategic plan remains a fuzzy item in one corner of the brain;
  4. Human tendency to postpone the difficult and unfamiliar, while adopting the easy and familiar investment related issues ;
  5. Behavioral challenges like Loss Aversion, Loss aversion is a cognitive bias that describes why, for individuals, the pain of losing is psychologically twice as powerful as the pleasure of gaining (Source : Wikipedia);

So the next time you are making an investment decision, spend a minute contemplating if you have addressed those big strategic issues ( aka nuclear reactor matter relating to your investment portfolio) or are you just spending time on the bicycle shed aspects of your investments.

Credits : An article by Prakash Iyer

http://www.businessworld.in/article/The-Bicycle-Shed-Effect/22-05-2020-192992/

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http://eepurl.com/c56-2r

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