Are you also grandiose?
Hi,
I am extra excited about the topic I want to share with you today.
It popped up in my morning reading and was a beautiful coincidence with my list of cognitive biases.
As you have noticed each monday I share a cognitive bias. I put it in context to investing with the aim to help you make better decisions and avoid losing money on bad bets.
Today the bias is Illusory Superiority.
I’m currently reading The Laws of Human Nature by Robert Greene and the Law of Grandiosity deals exactly with this bias.
I can tell for sure I fell into this trap a couple of times.
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Illusory Superiority is when we overestimate our own qualities and abilities compared to other people.
Depending on how we put our illusory imaginations into action this can have either negative or beneficial consequences.
As you can guess, most often negative consequences when we are unaware.
In my 20s (I’m 39 as of this writing, biologically a bit less and working hard to keep it that way :p ), I knew I was a good programmer and my eyes had opened up to innovation and entrepreneurship.
The iPhone had created a boom in demand for mobile software solutions and I found myself in the right spot to capitalize with my skills. There seemed to be a need for an app for everything and gaming was becoming mobile.
I ventured into founding a number of startups, not realizing that skill transfer is not an easy feat.
Building a business is 90% sales and operations, often summarized as execution, the idea and the product is a minor part. This is why most businesses fail, we romanticize the idea for a solution and the craft of building it.
Of course building efficiently is a very important 10% that if done wrong will also ultimately sink a business even if you are the best salesman in the world.
Entrepreneurship is the hardest game to improve your financial situation and that is why I recommend it as an optional level 6 of the 7 levels to financial independence.
Back then I could not see this. I was convinced that I would be a multimillionaire by age 30.
In parallel with my investing I thought I could pick any successful stock, based on my successes. Started playing with options and penny stocks aiming for faster wins.
Obviously that didn’t work out. Might have if I had dedicated the time to really learn.
Eventually I learned that there are no shortcuts.
What happened was simply Illusory Superiority. Total overestimation of my skills.
It happens when we are good at something and experience some level of success or praise.
And it can creep in at various levels. Doesn’t have to be anything exuberant we did.
Grandiosity is when we are victims of Illusory Superiority. When we think we are capable of more than what we actually are in reality.
You might be familiar with the old myth of Icarus, who wanted to fly higher than anyone else and eventually flew so high the sun burned off his wings.
Myths and stories exist to pass on learning.
It is not that we should not be ambitious and reach for the stars. We should, actually we must. The catch is that we need to stay humble and act within our current limitations. Keyword current.
We can experience two cases of grandiosity, one good and one bad.
Fantastical Grandiosity is pure Illusory Superiority. This is when we overestimate our skills and either live in a dream and never take action, or take action and get severely burned.
Practical Grandiosity is when we challenge ourselves within our current limitations.
In order to learn and progress we need to get out of our comfort zones. This only happens if we believe that we are capable of achieving more than we have been able to previously.
How do you distinguish between the two?
It all starts with being aware of your capabilities.
Write down the steps needed to achieve your goals.
Look for the skills and resources required.
Be humble and realistic.
Always add a percentage of required learning and discomfort to ensure progress.
How are you investing now?
Are you betting on stocks or crypto here and there?
Are you sure you are not delusional?
Do you know exactly what you are doing and where it will getyou?
If not, it might be reasonable to take a pause and upskill.
Do you have good success with some long term stock picks or ETF indexing?
Be careful switching to short term swing trading. Just throwing in some technical patterns without the right foundation might burn your wings.
Have you calculated how long it will actually take you to get to financial independence?
Have you thought about inflation, taxes and your own changes in cost of living over time?
Can simple indexing get you there by useful age?
As you can see the trick to combat our illusion is to dig into the details and ask ourselves what are the actual steps required.
This is super important if you want to invest to reach a goal and not just gamble for entertainment.
Make sure you invest in a way that matches your current skills.
Always strive to learn and improve.
This way you can increase your ambitions in concert with your skills.
The greatest danger of Illusory Superiority is that we fail to learn from our mistakes. We attribute our failures to everything else but ourselves.
For me the realization came entering my 30s and not being a millionaire. Time to grow up. Instead of staying in my builder comfort zone I started digging deep into all areas related to business creation and maintenance.
Instead of repeatedly trying to invest in the markets the same way, winning some, losing some, complaining about bad luck and unfavorable markets, I started to study how the pros actually invest and trade.
I have been building up my skills and setting my goals strategically since. I still indulge in delusions, they are just too delicious, but I then bring them down to reality and keep myself on track.
Hope I gave you an excuse to pause and check where you are on your own journey to financial freedom.
Find the right balance between skill and ambition and keep increasing both in tandem, aiming for your wildest dreams.
I’ll do my best to share as much learning as I can to aid you along the way.
When someone tells you active investing is too risky, simply question their skill and their ambition balance and level.
Then go prove them wrong.
Have a good one,
Chris
Originally posted 18th December 2023 on ElliottSays.com
Thank you for reading! :)
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