Money and Finance
Common Mental Mistakes
-
1) Overconfidence
2) Projecting the immediate past into the distant future
3) Herd-like behavior (social proof), driven by a desire to be part of the crowd or an assumption that the crowd is omniscient
4) Misunderstanding randomness; seeing patterns that don’t exist
5) Commitment and consistency bias
6) Fear of change, resulting in a strong bias for the status quo
7) "Anchoring"on irrelevant data
8) Excessive aversion to loss
9) Using mental accounting to treat some money (such as gambling winnings or an unexpected bonus) differently than other money
10) Allowing emotional connections to over-ride reason
11) Fear of uncertainty
12) Embracing certainty (however irrelevant)
13) Overestimating the likelihood of certain events based on very memorable data or experiences (vividness bias)
14) Becoming paralyzed by information overload
15) Failing to act due to an abundance of attractive options
16) Fear of making an incorrect decision and feeling stupid (regret aversion)
17) Ignoring important data points and focusing excessively on less important ones; drawing conclusions from a limited sample size
18) Reluctance to admit mistakes
19) After finding out whether or not an event occurred, overestimating the degree to which one would have predicted the correct outcome (hindsight bias)
20) Believing that one’s investment success is due to wisdom rather than a rising market, but failures are not one’s fault
21) Failing to accurately assess one’s investment time horizon
22) A tendency to seek only information that confirms one’s opinions or decisions
23) Failing to recognize the large cumulative impact of small amounts over time
24) Forgetting the powerful tendency of regression to the mean
25) Confusing familiarity with knowledge
- Howard Marks On The Biggest Investing Errors
From The Most Important Thing:The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing— these factors are near universal. Thus they have a profound collective impact...
- Edge Conversation With Rory Sutherland: This Thing For Which We Have No Name
Link to video and conversation text: This Thing For Which We Have No Name "No one ever got fired for buying IBM" is a wonderful example of understanding loss aversion or "defensive decision making". The advertising and marketing industry kind of...
- A Checklist For Investors - By Jason Zweig
Decades' worth of psychological studies show that people are extremely good at figuring out which information they need for a decision—but do a poor job of using that evidence methodically over time. You are likely to draw divergent conclusions...
- Howard Marks Interviewed By Hugo Scott-gall
Via Zero Hedge: Hugo Scott-Gall: How can we understand investor psychology and use it to make investment decisions? Howard Marks: It's the swings of psychology that get people into the biggest trouble, especially since investors’ emotions invariably...
- Morningstar Interview With Jason Zweig
Found via Simoleon Sense. The biggest and most surprising lesson to me came in an experiment that I did at Emory University. It was an example of what Gregory Berns, the neuroscientist who did the experiment, calls "learning without awareness." It turns...
Money and Finance
Applying Behavioral Finance to Value Investing - Presentation by Whitney Tilson
Common Mental Mistakes
-
1) Overconfidence
2) Projecting the immediate past into the distant future
3) Herd-like behavior (social proof), driven by a desire to be part of the crowd or an assumption that the crowd is omniscient
4) Misunderstanding randomness; seeing patterns that don’t exist
5) Commitment and consistency bias
6) Fear of change, resulting in a strong bias for the status quo
7) "Anchoring"on irrelevant data
8) Excessive aversion to loss
9) Using mental accounting to treat some money (such as gambling winnings or an unexpected bonus) differently than other money
10) Allowing emotional connections to over-ride reason
11) Fear of uncertainty
12) Embracing certainty (however irrelevant)
13) Overestimating the likelihood of certain events based on very memorable data or experiences (vividness bias)
14) Becoming paralyzed by information overload
15) Failing to act due to an abundance of attractive options
16) Fear of making an incorrect decision and feeling stupid (regret aversion)
17) Ignoring important data points and focusing excessively on less important ones; drawing conclusions from a limited sample size
18) Reluctance to admit mistakes
19) After finding out whether or not an event occurred, overestimating the degree to which one would have predicted the correct outcome (hindsight bias)
20) Believing that one’s investment success is due to wisdom rather than a rising market, but failures are not one’s fault
21) Failing to accurately assess one’s investment time horizon
22) A tendency to seek only information that confirms one’s opinions or decisions
23) Failing to recognize the large cumulative impact of small amounts over time
24) Forgetting the powerful tendency of regression to the mean
25) Confusing familiarity with knowledge
- Howard Marks On The Biggest Investing Errors
From The Most Important Thing:The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing— these factors are near universal. Thus they have a profound collective impact...
- Edge Conversation With Rory Sutherland: This Thing For Which We Have No Name
Link to video and conversation text: This Thing For Which We Have No Name "No one ever got fired for buying IBM" is a wonderful example of understanding loss aversion or "defensive decision making". The advertising and marketing industry kind of...
- A Checklist For Investors - By Jason Zweig
Decades' worth of psychological studies show that people are extremely good at figuring out which information they need for a decision—but do a poor job of using that evidence methodically over time. You are likely to draw divergent conclusions...
- Howard Marks Interviewed By Hugo Scott-gall
Via Zero Hedge: Hugo Scott-Gall: How can we understand investor psychology and use it to make investment decisions? Howard Marks: It's the swings of psychology that get people into the biggest trouble, especially since investors’ emotions invariably...
- Morningstar Interview With Jason Zweig
Found via Simoleon Sense. The biggest and most surprising lesson to me came in an experiment that I did at Emory University. It was an example of what Gregory Berns, the neuroscientist who did the experiment, calls "learning without awareness." It turns...