Tilson On Common Mental Mistakes
February 20, 2011 1 Comment
Wealthymatters reader , Andy Cheung , in response to yesterday’s post : Some Assumptions To Check Before Investing has sent a link to an excellent article by Whitney Tilson on common mental mistakes humans persistently make while investing . I think the article should be essential reading for all people who hope to make it good by investing.I didn’t want to just leave the link hidden among the comments,so I have posted a copy of the list of mistakes people make here.The link below will take you to the complete explanation of these 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
I’m not certain if we as human beings can avoid these mental traps.These thought processes however faulty are probably hard-wired into our brains.But referring to the list above each time we are reviewing our portfolios might help minimize some of the extreme mistakes we might make.
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