By Scott Woolley
Emotions can be expensive, especially when you start making investing
decisions with your gut instead of your brain. Fortunately, there are
ways to avoid–or at least limit–the mistakes that we oh-so-human
investors tend to make.
Daniel Kahneman won the Nobel prize in economics seven years ago for
his work on how irrational humans systematically make mistakes. Since
then, research in the field of behavioural finance has exploded.
Given the recent market turmoil what common, and costly, mistakes should investors be especially vigilant to avoid making today?
One is a direct result of the stock market plunge. People who bailed
out of stocks after losing as much as half of their investments are now
anxiously sitting out the market recovery, says Amy Barrett, a fee-only
financial adviser and director of investments at Savant Capital.
Those people have “anchored” themselves to the value of the stock
market at its trough, where they bailed out. They’re having a hard time
accepting the fact that stocks might really be good values at their new,
higher levels. In the past that behaviour has been a sure recipe for
missing a market rebound, says Barrett.
“I’d like to shake these people and tell them to get out of their rut,” she says.
Emotional Investors’ Seven Dumbest Mistakes
Here are descriptions of the most common cognitive errors investors
make–and some tips for getting your rational mind to override your
potentially costly emotions.
