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
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