| 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 “madness” tag
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Denial is an insidious and serious human condition that can be extremely dangerous to traders. I think out of all the human conditions, denial is one of the most harmful.
Denial keeps us stuck in doing a negative event over and over again regardless of the outcome. Have you ever heard the saying that madness is doing exactly the same thing over and over again and expecting a different result? Denial is usually why people do this!
Are you a losing trader who is trading the same way over and over again expecting different results? If so, you could be in denial. Look at the list below and see which of these apply to you:
- Poor or no record keeping
- Consistently losing month after month
- Not profitable
- Feeling helpless
- Frustrated and stuck
- Lying about your trading results to others
- Creating diversions to distract you from reality
- Needing to appear successful to feel successful
- Spending out of control
- Drinking or wild behavior
- Anxious when alone, can’t sit still
If you can identify with two on the above list then you may have a denial issue. If you identify with three or more you have a denial issue. There are different degrees of denial and the idea is that to be a successful trader you must objectively look at yourself and your trading. If you are in denial, or flirting with denial, you are not being objective and are stacking the odds against you that you will be a successful trader.
Denial is insidious, meaning that it begins without you really being aware that has begun. Be on guard for denial. To catch denial before it get out of control, look for the occasional twisting of the truth about your trading results or being lazy about keeping good trading records all indicate that you may not want to face the truth about your trading.
Denial is a disease in that it rarely gets better on its own. Denial rarely just goes away without being proactive and taking conscious action to intervene. Always seek the truth in yourself, your trading and in life and you will be less likely to have a denial problem. Seeking the truth usually takes energy and at times is the harder path to follow and accept, but this is the path you must always follow to avoid denial. As a trader you will not be successful living in denial. Do whatever it takes so that you do not live in denial. If you cannot fix it on your own, get help. You must learn to deal with reality and get a better result!
Twenty Six Market Wisdoms from Warren Buffett
1. It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.
2. Chains of habit are too light to be felt until they are too heavy to be broken.
3. Risk comes from not knowing what you’re doing.
4. Only when the tide goes out do you discover who’s been swimming naked.
5. If past history was all there was to the game, the richest people would be librarians.
6. I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
7. It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price
8. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful
9. Time is the friend of the wonderful business, the enemy of the mediocre. (more…)