Linda is quiet, studious and concerned with social issues. While an undergraduate at Yale, she majored in English literature and environmental studies. Given this information, indicate which of the following three cases is most probable.

A) Linda is a librarian.
B) Linda is a librarian and a member of the Sierra Club.
C) Linda works in the banking industry.

This question was presented to both undergraduate investment students, MBA students, and financial advisors. In all three cases, more than half of the subjects chose answer B- Linda is a librarian and a member of the Sierra Club. A majority of those asked selected that answer because being a librarian, and a member of the Sierra Club is representative of the type of career a studious person concerned with social issues might pick. However, the question asked which case is more PROBABLE, not which case would make Linda the happiest.

Answer A- Linda is a librarian- is a superior answer to B. Being a librarian, and a Sierra Club member is also being a librarian. That is, answer B is a subset of answer A. Because answer A includes answer B, it is more probable that case A is true. A quarter to a third of those asked usually understand this and choose answer A over answer B.

However, the best answer is C- Linda works in the banking industry. Many more people are employed by banks rather than libraries. In fact, so many more jobs exist in the banking industry that it is far more probable that someone works in the banking industry than as a librarian. Because working in the banking industry is not “representative” of the shortcut our brain makes to describe Linda, few people pick answer C.

You see, psychological research has shown that the brain uses shortcuts to reduce the complexity of analyzing information. These shortcuts allow the brain to generate an estimate of the answer before fully digesting all of the available information. Using these shortcuts allows the brain to organize and quickly process large amounts of information. However, these shortcuts also make it hard for investors to analyze new information correctly and can lead to inaccurate conclusions.

In fact, most investors associate losing money with a negative feeling. That may seem obvious, but investors often end up making the wrong decision while trying to avoid losing money. So when faced with uncertainty in a particular position, many investors may unknowingly use one of these shortcuts in the brain, and simply decide to liquidate their position for a loss.

In this case, investors are associating losing money with a negative feeling and are trying to do anything to avoid that feeling. So these investors may see a stock dip a few percentage points and then think it is time to get out, to avoid any further losses. When in reality, the stock was just experiencing a mild pull back, and still had the potential to continue climbing. However, because it is natural for humans to develop these shortcuts, and it is also natural to associate losing money with a negative feeling. This occurs far too often.

Even if you haven’t exhibited the particular behavior above, there are countless examples of investors using shortcuts to arrive at the wrong conclusions; which can be very costly mistakes. In any case, it is easy to see how using a simple, risk-controlled investment system can remove some of the burden that falls on individual investors. The key to investing is removing emotions from the equation and avoid the behavior detailed above, in order to arrive at an unbiased conclusion.

And the key to growing any portfolio is simply to ride winners and cut losers while they are still small. GorillaTrades takes the guesswork out of investing by telling you which stocks have the highest potential for capital appreciation, and then clearly explains EXACTLY when to enter into a position, and EXACTLY when to exit. With the Gorilla’s market advice, you can easily navigate through this “jungle” of a stock market. The Gorilla’s unbiased approach to investing takes no shortcuts along the way. Join GorillaTrades today!