Primacy Error

harryji (80)adminYour Wizardin Harry Potter Library • 2 years ago (edited)

Primacy error, which is the tendency for initial impressions to have a lasting and often disproportionate impact on individuals.

_{Photo: The Decision Lab}

Primacy error is exemplified in situations where love at first sight occurs.
It's akin to how newly hatched ducklings imprint on the first living being they see, believing it to be their mother. Similarly, in the world of trading and investments, first impressions matter greatly to bad investors.

The failure to adapt wrong decision leads to underreactions when losses occur.
As Michael Brooks aptly puts it, "Scientists who fall deeply in love with their hypothesis are proportionately unwilling to take no as an experimental answer."
This phenomenon suggests that investors who become infatuated with their initial investment thesis may struggle to accept negative outcomes.

On the flip side, Stuart Sutherland, in his book "Irrationality," discusses the halo effect and the devil effect.
If, upon first encounter, an investment idea is associated with a consistently declining price chart over the past decade, it is likely to be classified as a "bad" investment (referred to as a "dog" by investment professionals).
This initial impression can continue to influence our perception, even if the underlying fundamentals of the investment have significantly improved.
Consequently, perfectly viable companies may be unjustly avoided due to these biased initial judgments.

For committed value investors, this tendency may not come as a surprise. It underscores the importance of remaining open-minded and objective when evaluating investment opportunities.

Overcoming primacy error in cryptocurrency and stock investments is crucial. Stay informed, diversify your portfolio, and thoroughly research assets. Avoid impulsive decisions driven by FOMO and rely on clear investment goals. Combine technical and fundamental analysis for balanced judgments. Guard against overconfidence and seek professional advice when needed. Implement risk management strategies like stop-loss orders. Regularly review and adjust your portfolio based on changing market conditions. By following these principles, investors can reduce the impact of initial impressions and make more informed and objective investment decisions in dynamic markets.

Harry Potter Library (HPL) Community

Please join the HPL community. You will get upvotes for your posts. Simply join and post there using the tags "hpl" or "harrypotterlibrary" in your post.