Zeigarnik Effect on Investing.

October 30, 2019

I have observed two  kinds of investors… one who makes an investment in a financial product and the other who follows a financial plan to investing for fulfilling his long term goals. While both are credible, I have often found that the latter is someone committed to revisiting his investments more often to check how they are doing and also if needed enhancing his investments to make sure his goals are within reach. I have often struggled to explain this phenomenon..

 

Thanks to Rajesh Setty, Entrepreneur, Author, Speaker & Alchemist (www.rajeshsetty.com) over a call on book writing he beautifully elucidated the concept of Zeigarnik Effect, and voila… I had my moment of EUREKA.. except that I did not run naked.

 

Zeigarnik Effect, explained,  When you start working on something but do not finish it, thoughts of the unfinished work continue to pop into your mind even when you've moved on to other things. Such thoughts urge you to go back and finish the thing you have already begun. It's why you keep thinking about that unfinished novel. Unfinished work continues to exert an influence, even when we try to move on to other things.

 

Soap operas and serialized dramas also take advantage this phenomenon. The episode may end, but the story is unfinished. Cliffhangers leave viewers eager to learn more, and thanks to the Zeigarnik effect, they will remember to tune in next time to find out what happens.

 

You have probably also experienced this effect while in school. Before an exam, you probably had fairly good recall for the information that you were studying. After an exam, however, students often have difficulty remembering all of the things that they studied. Because you no longer have immediate use for it, the information sometimes feels like it has been flushed out of your memory.

 

 

The  Zeigarnik Effect  is credited to Lithuanian psychologist named Bluma Zeigarnik, a student of influential theorist Kurt Lewin. While sitting in a busy restaurant in Vienna, she noted that the waiters had better memories of unpaid orders. Once the bill was paid, however, the waiters had difficulty remembering the exact details of the orders.

 

Now how does Zeigarnik effect influence the investment world, If you consider each investment you make as a discreet one, then in your mind you are seeking a closure  once the investment is done, while it may bring you a little more peace, it may be quite ineffective. It is ineffective  since it does not afford you an opportunity to revisit the investment to either review or enhance the same.

 

 Contrarily if you consider your investment as merely a step in sequence of financial plan which had many more steps to go.. in your mind you are not seeking a closure.. but are going to be drawn to the investment plan several times.. to ensure that  you are proceeding towards a closure. Am sure this would keep you a little less at peace. But that may explain why people who follow a financial plan have a far greater chance to  succeed as compared to people who just make investments on the fly.

 

So even a half baked financial plan is better implemented than doing investments without a plan.    

 

 

 

 

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