Forbes recently included me in an article entitled “Here’s Why Smart Investors Make Dumb Mistakes.” The article discusses the habits investors allow to affect their judgment. Because we feel the pain of a loss more significantly than the joy of a gain, as evidenced in research completed by Daniel Kahneman and Amos Tversky, these habits often result in our inability to make wise decisions.
You may wonder why this matters. The answer is simple; when we exhibit the following biases, the effects can be damaging.
- Herd Mentality – moving in the direction of the crowd can result in a substantial loss; it can also lead to the undertaking of unnecessary risk. Each investor must decide, “Is the best course of action for me what. that everyone else is buying?
- Status Quo Bias – being creatures of habit we tend to return to the same investments time and time again rather than researching new opportunities. While it is wise to invest in companies and products we are comfortable with, limiting ourselves to options we can readily recall could also limit our upside potential. Investors need to spend time getting educated about all market options and potentially broaden their list of portfolio holdings.
- Confirmation Bias – we are often drawn to information that confirms our beliefs. This is especially damaging when our beliefs are biased and/or incorrect. For this reason it is wise to research various sources and topics including those that challenge your beliefs.
Most advisors can share stories of clients who have allowed a bias to stand in their way of taking advantage of great market opportunities. For this reason having a plan is extremely important. Have questions about your plan? Contact me at firstname.lastname@example.org or (877) 411-8781, Ext: 242.