Behavioral Finance: Avoid these Traits

BEHAVIORAL FINANCE is a new (relatively speaking) and trendy topic in the Investment World.  By avoiding many of the mistakes discussed below, you should be able to minimize a loss on your investment.  In the investment world, emotions and psychology can prevent investors from being rational (As was the case within the last year when investors pulled massive amounts of money from the markets).

1)   OVERCONFIDENCE:  When people are overconfident, they set overly narrow confidence bands.
                                       They set their high guess too low, and their low guess too high, thus they are
                                         surprised more often than expected.

2)  ANCHORING & ADJUSTMENT (CONSERVATISM):
                                         Analysts start out with info that leads them to their initial beliefs.
                                         They then respond too conservatively to new information, not revising enough.

3)  REPRESENTATIVENESS: Judgement based on stereotype (thinking a good comp is a good investment)
                                             "Winner-Loser effect"- Past 3-yr loser stocks do better than 3-yr winners.

4)  LOSS AVERSION:  People take on more risk when they're at a loss, because they hate to lose
                                   People exhibit "Get-Eventitis" (Get Even)

5)  HOUSE MONEY:  People think of their stock gains as "House Money"
                                They tend to take more risk with that money since they don't think of it as their own

6)  REGRET:  Emotion experienced for not making the right decision.
                    If you experience regret intensely, you'll have regret minimization (try to avoid possible losses)
                    However, this may not be appropriate for your ABILITY TO TAKE RISK

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