Successful investing is as much about behavior as it is about math or analysis or picking the right stocks. That is why traits like consistency, discipline, and self-control can translate into long-term profits for the individual investor. In short, improving behavior can improve results.
That is exciting because there are so many factors beyond our control. We can’t influence the next earnings report, or whether the market responds well to economic data, or whether the market environment is volatile or calm.
But improving our own behavior — a major factor that is definitely within our control — can elevate long-term performance over time.
So how do you improve behavior? How do you achieve higher consistency, self-discipline, and emotional control?
One of the simplest ways to “raise the bar” as an individual investor is to raise expectations for yourself. Just by recognizing that a higher level of performance is attainable, and expecting to achieve it, you can potentially get results.
It almost sounds too simple, but it works. This was shown via the Pygmalion Effect (also known as the Rosenthal Effect), as demonstrated with California elementary school students in the 1960s.
To test their hypothesis that expectations could impact outcomes, Robert Rosenthal and Lenore Jacobson gave a specially designed IQ test — a test of general intelligence — to an entire elementary school.
Rosenthal and Jacobson then selected roughly 20% of the students at random and labeled them “intellectual bloomers.” The teachers were then told to expect great things from these “intellectual bloomers” over the course of the coming school year.
The IQ test, which was real, was administered again at the end of the study. The whole elementary school across all six grades improved. But among first and second graders especially, the kids labeled “intellectual bloomers” showed statistically significant gains over their peers.
This was surprising because the “bloomer” label was assigned randomly. The teachers believed the bloomers to be gifted, when in fact there was no special selection criteria.
The purpose of the experiment was to see if modified behavior from the teachers — in the form of higher expectations brought about by a label — would have an impact. It absolutely did. By the end of the school year, the teachers had created a kind of self-fulfilling prophecy, in which the randomly labeled “bloomer” students saw genuine advancement.
The result of the study — in which expectations of performance create their own reality — was dubbed the Pygmalion Effect, after the mythical story of a Greek sculptor who created a statue of a woman so beautiful he fell in love with it. As a gift from the goddess Aphrodite, the statue came alive and became Pygmalion’s wife, turning hope and expectation into reality.
The Rosenthal-Jacobson study might not be repeatable today for ethical reasons. Now that we know expectations have an impact on results, it wouldn’t be fair to have some kids in a school labeled gifted and the others not. To the extent it motivates teachers, the label itself is an edge.
As individual investors, though, we can use the Pygmalion Effect to our own benefit. To a certain extent, “If you believe you can, then you can.” This is not true for many things. Most of us will never be able to slam dunk a basketball or solve a theoretical physics equation, for example. But when it comes to our own investment behavior, and raising the bar in areas like consistency, self-discipline, and emotional control, it certainly applies.
Investment software can also help in the behavioral upgrade quest. Willpower and motivation can get the ball rolling, but implementing systems and routines, enabled by software, make it easier to stay on track.
Having the tools to make high-quality decisions, over and over with consistency each time, can reinforce winning habits. Combining this knowledge with raised expectations — setting the bar higher and convincing ourselves we can reach it — is how all investors can use the Pygmalion Effect.
Richard Smith, Ph.D.
CEO & Founder, TradeSmith