- Negative predictions: Overestimating the likelihood that a market or economic report will have a negative outcome.
- Negatively biased recall: Remembering negatives while ignoring positives.
- Basing future decisions on “sunk costs.” e.g., investing more money in a business that is losing money because you’ve invested so much already.
- Delusions: Holding a fixed, false belief despite overwhelming evidence to the contrary.
- The Halo Effect: Perceiving qualities to one company due to its association with another (ie, JC Penney’s CEO was Apple’s former head of Retail).
- Overgeneralizing Generalizing a belief that may have validity in some situations to every situation.
- Overvaluing things because they’re yours.: e.g., perceiving your portfolio holdings as more attractive because they are yours. Or, overestimating the value of your home when you put it on the market for sale.
- Failure to consider alternative explanations: Coming up with one explanation for why something has happened/happens and failing to consider alternative, more likely explanations.
- The Self-Serving Bias The self-serving bias is people’s tendency to attribute positive events to their own skills but attribute negative events to external factors. (See these Tips for overcoming the self-serving bias.)
- Failure to consider opportunity cost: There is a cost to every holding you have, as that capital could be deployed in productive uses.
- “You don’t know what you don’t know.” Having a 3rd party provide an outsiders perspective can help you avoid being blindsided by whats outside of your understanding.
- The belief that more information and analysis will lead to problem solving insight: Excess information often leads to excess confidence and poor decision making.
- The Peak-End Rule: The tendency to most strongly remember (1) how you felt at the end of a trade, or (2) how you felt at the moment of peak emotional intensity during the trade. Biased memories can lead to biased future investment decision making.
- The tendency to prefer familiar things: Familiarity breeds liking. Think about why people tend towards certain stocks or sectors or assets — its often the familiarity as opposed to something intrinsic about those holdings.
- Positively biased predictions: Once you commit capital to a given investment, you can easily allow your hopes and desires for it succeed to interfere with your ability to objectively evaluate it.
- Repeating the same behavior and expecting different results (or thinking that doubling-down on a failed strategy will start to produce positive results). What more does anyone need to say about doubling down on bad trades?
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