Wednesday, June 18, 2014 1:22:39 AM
5 Brain Flaws that make you a lousy investor
http://www.cnbc.com/id/101766393
Prospect theory or "framing." If investors lose 10% in the market they're much more upset than they are happy if they gain 10% in the market. The lopsided reaction to positive and negative information leads investors to make faulty conclusion about decisions and market movements, Huber says.
Human minds are hardwired with traits that might serve us well when trying to survive, but are detrimental when attempting to make wise investment decisions. Huber lists the way your brain is killing your portfolio, including:
Trading bias. The kind of investor you are can greatly taint your ability to succeed at investing. Bargain-hunting investors, looking for stock deals, tend to buy stocks too early, Huber says. But right when the stocks start to get cooking, and real gains are yet to come, these value investors sell too early, leaving gains on the table. Similarly, growth investors looking for the next big thing often buy too late, once stocks have already rocketed higher, he says. These growth investors might enjoy some of the stock's ride up, but then hold on too long and let those gains slip away.
Recency effect. Investors often make the costly mistake of thinking what's going on now will continue, and that somehow the present is a harbinger for the future. In investing, investors think companies performing poorly now will continue to struggle, Huber says. And the same error in thinking leads investors to think that companies that are doing well will keep doing well. Huber calls this faulty thinking "distorted ROE reversion."
Sunk cost fallacy. "It will come back" are some of the most dangerous words in investors' vocabulary. Investors can't bear with the idea they made a mistake in choosing a stock. So when a stock falls, they often double down on it thinking that will cause them to make up their losses that much more quickly. The trouble is that investors are often better off cutting their losses and moving on, Huber says.
Overconfidence effect. The current bull market is leading many younger investors into a false sense of security. Rather than recognizing that rising stocks are lifting nearly everyone's portfolios, investors suffering from the overconfidence effect think their gains are due to skill. Such overconfidence leads investors to pile into risky areas of the stock market, since the investors think they'll know when to bail out. Yeah, right.
5 Brain Flaws that make you a lousy investor
http://www.cnbc.com/id/101766393
Prospect theory or "framing." If investors lose 10% in the market they're much more upset than they are happy if they gain 10% in the market. The lopsided reaction to positive and negative information leads investors to make faulty conclusion about decisions and market movements, Huber says.
Human minds are hardwired with traits that might serve us well when trying to survive, but are detrimental when attempting to make wise investment decisions. Huber lists the way your brain is killing your portfolio, including:
Trading bias. The kind of investor you are can greatly taint your ability to succeed at investing. Bargain-hunting investors, looking for stock deals, tend to buy stocks too early, Huber says. But right when the stocks start to get cooking, and real gains are yet to come, these value investors sell too early, leaving gains on the table. Similarly, growth investors looking for the next big thing often buy too late, once stocks have already rocketed higher, he says. These growth investors might enjoy some of the stock's ride up, but then hold on too long and let those gains slip away.
Recency effect. Investors often make the costly mistake of thinking what's going on now will continue, and that somehow the present is a harbinger for the future. In investing, investors think companies performing poorly now will continue to struggle, Huber says. And the same error in thinking leads investors to think that companies that are doing well will keep doing well. Huber calls this faulty thinking "distorted ROE reversion."
Sunk cost fallacy. "It will come back" are some of the most dangerous words in investors' vocabulary. Investors can't bear with the idea they made a mistake in choosing a stock. So when a stock falls, they often double down on it thinking that will cause them to make up their losses that much more quickly. The trouble is that investors are often better off cutting their losses and moving on, Huber says.
Overconfidence effect. The current bull market is leading many younger investors into a false sense of security. Rather than recognizing that rising stocks are lifting nearly everyone's portfolios, investors suffering from the overconfidence effect think their gains are due to skill. Such overconfidence leads investors to pile into risky areas of the stock market, since the investors think they'll know when to bail out. Yeah, right.
5 Brain Flaws that make you a lousy investor
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