October 14, 2009 
Before we turn to the business of wealth planning, let’s have some fun. Quick, which square is darker, A or B? (If you need to, click here for a larger view.)
I was astounded (and initially skeptical) to learn they are identical colors! If you don’t believe me, click here for the demonstration of how contrast and shadows can bamboozle our eyes into seeing what simply isn’t there. (Incidentally, this is the same type of trickery that makes the moon seem larger on the horizon, even though we know it’s not.)
Clearly, you can’t always trust your instincts. It’s why airline pilots have to rely on their calibrated instruments along with the view in front of them. Turning to your wealth, it’s why it’s important to heed the academic evidence as much, if not more than, your intuitions about how markets and investing really work.
Consider, for example, a study published in the Journal of Consumer Research, “The Long and Short of it: Why Are Stocks With Shorter Runs Preferred?”1 The authors demonstrated that investors preferred stocks whose charts display shorter “run lengths” (up-and-down movements) than those with longer run-lengths. Investors tended to perceive that the short-run-length stocks were less risky, regardless of the actual risk involved. Interestingly, the effect grew even stronger among those who were more highly educated and had more trading experience, i.e., those who thought they knew better. (Click here for additional information.)
Like it or not, our minds truly can play some sneaky tricks on us. When viewing Wikipedia games, that can all be in good fun. But when it comes to your wealth it’s serious business, and an illustration of why it’s important to focus on the investment “horizon” — your own long-term goals — rather than the illusion of individual stock charts.
