| Psychological Bias | Effect on Investment Behavior | Consequence |
| Overconfidence | Trade too much. Take too much risk and fail to diversify | Pay too much in commissions and taxes. Susceptible to big losses |
| Attachment | Become emotionally attached to a security and see it through rose-colored glasses | Susceptible to big losses |
| Endowment | Want to keep the securities received | Not achieving a match between your investment goals and your investments |
| Status Quo | Hold back on changing your portfolio | Failure to adjust asset allocation and begin contributing to retirement plan |
| Seeking Pride | Sell winners too soon | Lower return and higher taxes |
| Avoiding Regret | Hold losers too long | Lower return and higher taxes |
| House Money | Take too much risk after winning | Susceptible to big losses |
| Snake Bit | Take too little risk after losing | Lose chance for higher return in the long term |
| Get Even | Take too much risk trying to get break even | Susceptible to big losses |
| Social Validation | Feel that it must be good if others are investing in the security | Participate in price bubble which ultimately causes you to buy high and sell low |
| Mental Accounting | Fail to diversify | Not receiving the highest return possible for the level of risk taken |
| Cognitive Dissonance | Ignore information that conflicts with prior beliefs and decisions | Reduces your ability to evaluate and monitor your investment choices |
| Representativeness | Think things that seem similar must be alike. So a good company must be a good investment | Purchase overpriced stocks |
| Familiarity | Think companies that you know seem better and safer | Failure to diversify and put too much faith in the company in which you work |
Archives of “investment behavior” tag
rssInvestment philosophy
- “Good information, thoughtful analysis, quick but not impulsive reactions, and knowledge of the historic interaction between companies, sectors, countries, and asset classes under similar circumstances in the past are all important ingredients in getting the legendary ‘it’ right that we all strive so desperately for.”
- “[T]here are no relationships or equations that always work. Quantitatively based solutions and asset-allocation equations invariably fail as they are designed to capture what would have worked in the previous cycle whereas the next one remains a riddle wrapped in an enigma. The successful macro investor must be some magical mixture of an acute analyst, an investment scholar, a listener, a historian, a river boat gambler, and be a voracious reader.Reading is crucial. Charlie Munger, a great investor and a very sagacious old guy, said it best: ‘I have said that in my whole life, I have known no wise person, over a broad subject matter who didn’t read all the time — none, zero. Now I know all kinds of shrewd people who by staying within a narrow area do very well without reading. But investment is a broad area. So if you think you’re going to be good at it and not read all the time you have a different idea than I do.'”
- “[T]he investment process is only half the battle. The other weighty component is struggling with yourself, and immunizing yourself from the psychological effects of the swings of markets, career risk, the pressure of benchmarks, competition, and the loneliness of the long distance runner.” (more…)