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30 December 2021

How to avoid investments mistakes

Author: Luigi Campopiano


Children are exceptional: for them, there is no word failure. They try and try again until they learn a new skill (through mistakes, they understand what they need to correct). And as for the child, so it is for the adult: learning passes through making-mistakes-correcting oneself. 

Quoting the poet William Butler Yeats: "Education is not the filling of a pot but the lighting of a fire." To confirm this, human sciences scholars have analyzed the learning phases and have come to outline the process of acquiring skills in four distinct and always present phases. It doesn't matter what we have to learn: the stages are always the same four. They are also known as "levels of competence," and together, they constitute the so-called "learning matrix":

1. Unconscious incompetence "I don't know I don't know." An individual is not even aware that he is unaware of a problem or a shortcoming of his own. To overcome it, it is necessary that someone points this out to the person, or that the person, acting casually, enters a new situation whereby at a certain point, he realizes that he does not know/know how to do something;

2. Conscious incompetence "I know I don't know." A little stress/worry may arise because now the individual realizes that he does not know how to do something and understands the need to learn how to do it. We pass from "I would like" to "I want";

3. Conscious competence "I know how to do it, but I need the commitment to do it right." You enter the experimental phase, and it is time for real learning through trying and trying again. The first few times that something will be done in a cumbersome way and with a lot of effort (it will be necessary to think about every precise phase and passage of execution of the task itself), but the more you try your hand at the practice, the more it will become automatic;

4. Unconscious competence. From practice to practice, at some point, the person will be able to automate the processes necessary to try their hand.

The learning matrix allows us to gain direct experience and learn from our mistakes. However, there are situations in which it would be better to avoid errors a priori, or at least limit them: an example is a financial investment (no one would dream of investing part of their capital if they do not know the market, accepting the risk of losing a large part of the savings). In this case, learning "by trying on your skin" is certainly not the best solution because you can risk getting burned. 

In that case, it would be better to be guided by an expert who can guide us on the right path. A good financial advisor can perform this function: he can guide us in the four stages of learning related to financial matters and lead us to develop an education that is increasingly aware of the dynamics of the markets, limiting our "falls". Here are the four stages:

1. Many people are unaware that they do not know that there are several ways to invest their savings and make them pay, much more than keeping them in a bank account. The financial advisor can make them aware of this, transferring concepts and giving advice (the cognitive asymmetry between the two subjects is important); 

2. At this point, the customer can enter into a collaborative relationship with his consultant, who will educate him to understand the market;

3. From consultancy to consultancy, the client can learn something about the subject each time until he understands more about which products are best for his personal profile. The potential investor gradually begins to distinguish opportunities from market risks and to bridge the cognitive asymmetry;

4. When the person interested in investing has a clear panorama of possibilities to make his savings make the most of, at that point, the consultant can help him invest in the best way, this time through a dialogue between two aware subjects.

This is why a financial consultant can be the solution to guide each person through progressive learning of the financial subject without however incurring ruinous falls that could be costly in every sense. There is no learning without honest feedback from an external person.


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