Good Investing Lessons

People have developed certain ways of looking at the world that served them well in more primitive circumstances; however, when it comes to trading, those perceptions get in the way. Scientists call distortions in the way people perceive reality cognitive biases. Here are some of the cognitive biases that affect trading: • Loss aversion: The tendency for people to have a strong preference for avoiding losses over acquiring gains. • Sunk costs effect: The tendency to treat money that already has been committed or spent as more valuable than money that may be spent in the future • Disposition effect: The tendency for people to lock in gains and ride losses • Outcome bias: The tendency to judge a decision by its outcome rather than by the quality of the decision at the time it was made • Recency bias: The tendency to weigh recent data or experience more than earlier data or experience • Anchoring: The tendency to rely too heavily, or anchor, on readily available information • Bandwagon ef...