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Trading Madness

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