Why you need to walk the plank as an investor

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If I asked you to walk across a 10m long, 20cm wide plank that is 10cm above the ground, I'm sure you would have no trouble doing it. No one falls off at 10cm. Raise it to 1m and likely this will still be simple enough. Raise it to 2m and you'll probably start feeling shaky. Raise it to 10m and you'll probably say, "Thanks, but no thanks."

This seems rational - it's too risky, right? Or is it? The risk of falling hasn't actually changed, only the consequences of falling. You've already proven that you can walk the plank at lower heights without falling, so why should the increased height make any difference?

The consequence of, and our fear of, failure has significantly increased.

walking the plank investing

Most people when faced with this increased height focus on the consequence of failure rather than the goal. And as humans the more we focus on negative consequence, the more likely we are to realise that as our reality. No one falls off at 10cm, but most people would stumble or baulk at 10m, even though the task is the same and should carry no additional risk.

Anyone who was brought up on country roads knows that when you pass a big rig at night you never look at the oncoming headlights, you look at the black space next to the truck where the road is. This is because you are more likely to drift towards the thing you are focusing on.

Focusing on the truck to avoid it increases the likelihood of having an accident. Focus on where you want to go, not what you want to avoid.

Back to the plank. Even if you did walk across it at a 10m height, a watching crowd may not give you great adulation for your efforts. If you want love (returns) from the crowd (market) for your effort (investment), you need to increase the risk. No risk, no reward.

Say we decide to add something risky to our plank walk, like a backflip, where the consequence for failure is large at the 10m height (a sizeable investment). To do this for the first time at 10m is almost certain to end in tears.

So, the seasoned performer practises the risky manoeuvre on the ground until it comes as naturally as walking, then raises the consequence to 30cm, 1m and then, finally, 10m. This is where they will receive the greatest adulation, and many happy returns.

Know the difference between risk and consequence.

Doing things with higher consequence but lower risk (such as putting most of your life savings into blue-chip shares) is unlikely to give you great short-term returns if that is your goal.

Conversely, if you are crippled with the fear of losing everything, you are likely to panic at some point and become your own self-fulfilling prophecy.

But don't forget that jumping straight into high-risk investments without any practice or experience is also a sure-fire way to devastate your finances. When you start, you may make some silly mistakes.

This is okay. For most of us it is the only real way to learn.

Practise with small investments first. Find a manoeuvre or industry that you understand and that works for you, then slowly raise the stakes.

Even the most experienced of plank walkers fails every now and then, which is where the safety net of a balanced portfolio is critical for those times when unexpected wind gusts blow you off balance.

Things to help you succeed

1. Focus on the outcome

If you focus on what you fear, that's where you'll end up. Set your sights on your goals and focus on how you are going to overcome challenges rather than on the challenges themselves.

2. Start small

Practise little test-and-learn experiments, creating safe spaces to fail. Invest in something small, learn what you can from observing performance, then tweak it until you get something that seems to work. Patience is a virtue and life is not a race. Slowly increase your investment "height" so that you can learn new lessons along the way without wiping out your savings.

3. Learn by watching others (not the market)

I am often amazed at how many people study the market to understand how to trade. That is like watching the crowd instead of the performer. Closely observe other experienced investors and learn from them. However, be wary of "pop" investors and of jumping on investment fads. If you can see a trend, you've probably already missed it.

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Phil Slade is a behavioural economist and psychologist and the author of Going Ape S#!t! and founder of Decida. He works across digital innovation, strategy and cognitive bias.
Comments
john d
December 8, 2021 8.43pm

Great article to explain risk - nothing changes about walking on the plank. However, consequences swaying you a lot as you get higher (more invested). If you concentrate on just walking the plank instead of looking down, you should not be swayed with the market sentiment. Just stay on the plank focussed on getting one foot after the other. Simple but thought provoking article. Thanks, Phil.

Abhinav Temani
December 9, 2021 1.38am

Interesting parallels drawn using plank, explaining very well the concepts of risk and consequence