cognitive errors influence investors and create stock market anomalies such as bubbles and crashes.
But are human flaws consistent and predictable such that they can be:
1) avoided and 2) exploited for profit?
“Investing is not a game where the guy with the 160 IQ beats the guy with
the 130 IQ…Once you have ordinary intelligence, what you need is the
temperament to control the urges that get other people into trouble in
investing.” -- Warren Buffett
Before making a investment decesion you must go through all listed Mental mistake as your checklist to sound investment.
Common Mental Mistakes
• Overconfidence
• Projecting the immediate past into the distant future
• Herd-like behavior (social proof), driven by a desire to be part of the crowd
Common Mental Mistakes
• Overconfidence
• Projecting the immediate past into the distant future
• Herd-like behavior (social proof), driven by a desire to be part of the crowd
• Misunderstanding randomness; seeing patterns that don’t exist
• Commitment and consistency bias
• Fear of change, resulting in a strong bias for the status quo
• “Anchoring” on irrelevant data
• Excessive aversion to loss
• Using mental accounting to treat some money (such as gambling winnings or an unexpected bonus) differently than other money
• Allowing emotional connections to over-ride reason
• Fear of uncertainty
• Embracing certainty (however irrelevant)
• Overestimating the likelihood of certain events based on very memorable data or experiences (vividness bias)
• Becoming paralyzed by information overload
• Failing to act due to an abundance of attractive options
• Fear of making an incorrect decision and feeling stupid (regret aversion)
• Ignoring important data points and focusing excessively on less important ones; drawing conclusions from a limited sample size
• Reluctance to admit mistakes
• After finding out whether or not an event occurred, overestimating the degree to which they would have predicted the correct outcome (hindsight bias)
• Failing to accurately assess their investment time horizon
• A tendency to seek only information that confirms their opinions or decisions
• Failing to recognize the large cumulative impact of small amounts over time
• Forgetting the powerful tendency of regression to the mean
• Confusing familiarity with knowledge
• Commitment and consistency bias
• Fear of change, resulting in a strong bias for the status quo
• “Anchoring” on irrelevant data
• Excessive aversion to loss
• Using mental accounting to treat some money (such as gambling winnings or an unexpected bonus) differently than other money
• Allowing emotional connections to over-ride reason
• Fear of uncertainty
• Embracing certainty (however irrelevant)
• Overestimating the likelihood of certain events based on very memorable data or experiences (vividness bias)
• Becoming paralyzed by information overload
• Failing to act due to an abundance of attractive options
• Fear of making an incorrect decision and feeling stupid (regret aversion)
• Ignoring important data points and focusing excessively on less important ones; drawing conclusions from a limited sample size
• Reluctance to admit mistakes
• After finding out whether or not an event occurred, overestimating the degree to which they would have predicted the correct outcome (hindsight bias)
• Failing to accurately assess their investment time horizon
• A tendency to seek only information that confirms their opinions or decisions
• Failing to recognize the large cumulative impact of small amounts over time
• Forgetting the powerful tendency of regression to the mean
• Confusing familiarity with knowledge
WE WILL DISCUSS ALL IN DETAIL NEXT POSTS
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