Mistakes Become Anchors When We Refuse to Accept Them

In The Psychology of Money, Morgan Housel writes extensively about how our relationship with money is shaped by behaviour more than spreadsheets. One of the most expensive behaviours is allowing the past to influence decisions that should belong to the future.

One of the hardest things about making decisions is that we rarely know whether we made the right one until much later. And even then, the outcome does not always tell us what we need to know.

Sometimes we make a poor decision and get lucky. Things work out, and we congratulate ourselves on our judgement. At other times, we think carefully, weigh the evidence, assess the risks and make a perfectly reasonable decision, only to see things go against us. We call the first good judgement and the second a mistake. That is where our trouble begins.

The outcome of a decision and the quality of the decision are two different things. We tend to judge them as one because outcomes are visible, while the decision-making process is harder to examine. A good outcome can reward bad judgement, encouraging us to repeat it. A bad outcome can punish good judgement, making us abandon a process that was working exactly as it should.

We see this often in investing. An investor buys a stock after careful research, with a clear understanding of its risks and a sensible investment horizon. The business performs well, but the stock falls because of an unexpected event. Another investor buys something on a tip, without understanding the business, and makes a handsome profit. Who made the better decision? If we judge only by the returns, the answer appears obvious. If we examine the process, it may be the opposite.

At KompassIQ.com, we believe this distinction matters because wealth is built through a series of decisions, not a handful of outcomes. A sound process will not protect us from every loss, just as a poor process will not prevent every gain. The objective is not to be right every time. It is to make decisions that are sensible given what we know at the time, and to remain open to new information that could change our view.

This is also where accepting mistakes becomes important. When an outcome disappoints us, our first instinct is often to change something. We sell an investment, abandon a strategy or question a long-held belief. Sometimes that is exactly what we should do. But sometimes we are simply reacting to an unfavourable outcome, mistaking discomfort for evidence that our process was wrong. The reverse is equally dangerous. When a decision works out, we rarely examine whether we were merely lucky.

The answer is not to stick stubbornly to every decision. It is to examine the reasoning behind it. Has the original thesis changed? Were important risks overlooked? Has new information altered the facts? Or has the outcome simply been different from what we expected? These questions help us distinguish between a decision that needs correction and one that merely requires patience.

A mistake becomes an anchor when we defend it because we have already invested too much in it. But another kind of anchor is created when we abandon a sound process because we cannot accept a disappointing outcome. Both keep us trapped in the past.

There is a practical way to test whether the past is influencing a decision that belongs to the future. Ask yourself: If I had the current value of this investment in cash today, would I invest that money in the same asset, at its current price, given what I know now?

If the answer is yes, revisit the reasons. Does the investment still fit your objectives? Are the original assumptions still valid? Is the expected return, relative to the risk, attractive enough to justify holding it?

If the answer is no, ask why you are still holding it. Is there a sound, forward-looking reason to stay invested, or is your reluctance to sell driven mainly by the desire to recover what you have lost?

Your purchase price matters when calculating your gain or loss, but it does not, by itself, determine whether you should continue holding an investment. The market does not know what you paid, and it has no obligation to bring the price back to that level.

This test does not mean selling whenever you would not buy more of an asset. Taxes, transaction costs, portfolio concentration and the role an investment plays in your overall plan also matter. The point is to assess the holding on its merits today, rather than allowing yesterday’s decision to dictate tomorrow’s.

Good decision-making is not about being right every time. It is about having the courage to correct a flawed process and the patience to trust a sound one, even when the outcome temporarily disappoints us.

Because in the long run, we cannot control every outcome. We can, however, take responsibility for how we make our decisions. And that is where better judgement begins.