Tilson On Common Mental Mistakes


wealthymatters.comWealthymatters 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

http://www.tilsonfunds.com/How%20to%20Avoid%20–%20and%20Profit%20From%20–%20Manias,%20Bubbles%20and%20Investor%20Irrationality.pdf

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.

About Keerthika Singaravel
Engineer,Investor,Businessperson

One Response to Tilson On Common Mental Mistakes

  1. Pingback: Who Is Whitney Tilson ? « Wealthymatters

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