Buffett said, be fearful when others are greedy, and be greedy when others are fearful.

It sounds simple, but in fact it is difficult to do.

To be unique, you need an extremely strong self and an extremely alternative personality.

Interpreting Buffett's famous saying from the perspective of behavioral economics is: People can easily wander between overconfidence and over-pessimism.

What is overconfidence?

Overconfidence can also be called "over-optimism".

There is a term in psychology called pessimistic realism. Pessimistic people tend to see the world more accurately. But life requires optimism, even though this optimism is inevitably self-deceptive.

Life is a repeated game with a limited number of times. If we start from the last game in life to find the equilibrium solution, then the equilibrium solution of the last game is game over - we will all die.

Pushing forward from the back, you will come to the conclusion: everything we do now is meaningless.

If we were so rational and sober, we would not be able to live, so people must be optimistic, but this optimism may be overly optimistic.

The most direct manifestation is that most people think that their level is above the average.

For example, ask a driver, how are your driving skills? 90% of drivers consider their driving skills to be above average.

In addition, there is a flaw in the cognitive model called "hindsight". This "hindsight" can also lead to our overconfidence. "Hindsight" means that in hindsight, we overestimate our ability to make accurate judgments beforehand.

The reason why we are reluctant to admit that we have made a mistake is because we are afraid of "cognitive dissonance." If there is a contradiction between our concepts and the real world, we will feel very painful. Therefore, not only will we not change our ideas, but we will strengthen our original perceptions.

Excessive optimism will cause us to underestimate risks and act blindly impulsively when making decisions.

So what is excessive pessimism?

We have an instinctive tendency to fear losing what we already have.

Kahneman, the author of "Thinking, Fast and Slow", is a pioneer of behavioral economics and a psychologist who won the Nobel Prize in Economics. Kahneman and Amos Tversky proposed a theory called "Prospect Theory". To give a simple example, "Losing a hundred dollars brings us more pain than getting a hundred dollars brings us pleasure."

Just imagine:

You go for surgery and the doctor tells you that the surgery has a 90% chance of success. Are you willing to do it? will most likely happily agree. But what would you do if the doctor told you that there was a 10% chance that the operation would fail? I'm afraid I need to think about it.

From a mathematical point of view, a 90% probability of success and a 10% probability of failure mean the same thing, but why do you have different reactions? It's your inner psychological mechanism at work.

There is also the "endowment effect" - we overestimate the value of things we believe we own. Professor Thaler discovered that even if something has just come to us and is not really given to us, we will think it is ours and are unwilling to let it go. This excessive pessimism can make us afraid to try and afraid of failure.

Moreover, people’s behaviors can influence and infect each other:

If all people become overly optimistic at the same time, they will become overly optimistic at other times. pessimistic. As a result, the economy will sometimes be overheated and sometimes too cold. This is the origin of economic fluctuations.

What should we do about this?

The following suggestions from economist Professor He Fan:

First, you cannot go against the direction of the group's action. If everyone wants to squeeze into the cinema and you have to squeeze out, you will probably be trampled by the crowd. If you have to be in a crowd, the best strategy is to go with the crowd.

Second, don’t always stay in the crowd. If you like liveliness and always like to be crowded in crowds, you must be careful, because the behavior of the group will change suddenly and unexpectedly.

Since it is difficult to change the behavior of a group, if the crowd does panic, then you can only leave it to fate.

Third, the best strategy is: stand outside the crowd, but maintain contact with the crowd. In this way, you can avoid all kinds of troubles caused by being separated from the crowd without being involved in the torrent. In most cases, it is safer to be a trend-watcher than a trendsetter.

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