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Impulse Control

September 11, 2023 | Posted in: Insights, Investing

Yale law professor, Amy Chua, is best known for her book Battle Hymn of the Tiger Mother in which she discusses her decision to raise her daughters the “Chinese” way which involves very strict rules and high expectations. However, she also wrote a very successful book titled The Triple Package which identifies three characteristics that explain the rise and fall of cultural groups in America. I believe one of them, impulse control, is also the key to successful investing. Setting up a well- structured, diversified portfolio is not that difficult today given the availability of financial advice as well as turnkey vehicles such as target date funds.

The challenge is to stick with the program. Specifically, there are two times when impulse control becomes particularly important. First, many people increase their risk tolerance in concert with a rising stock market which makes the subsequent decline even more painful and costly. At the other extreme, both individuals and institutions have a strong tendency to throw in the towel right at the bottom of the market cycle. Various studies suggest that these impulsive acts cost the average investor 2-3% per annum in annual return versus a simple buy and hold strategy. So, the message is: set up your investment program intelligently and then steel yourself against excess optimism or pessimism by sitting on your hands when you feel the impulse to act.