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415.472.1445 ext 306

Kathleen Nemetz
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Kathleen Nemetz, Certified Financial Planner (TM) Practitioner
Mental shortcuts for decision-making sometimes
trip us when analysis is warranted
  
Policy statements, plans and strategies can help keep investors on target.
 

 

Many-do it-yourself investors wonder why they often end up buying high and selling low. It's probably not for lack of intelligence. Bad judgments can arise if investors are not introspective about their real motivations for selecting a time to buy or sell, or any specific investment.

 

Psychologists have identified a number of common biases guiding the investment decisions of less experienced investors.   If you are wondering whether the latest crisis in world events should guide a specific buy or sell decision, take a look at this list and reflect first what other motivations may be prompting you.

 

Reasoned investing usually does best within the framework of a plan or investment policy statement. Then the investor can calibrate individual choices to fit with the overall strategy and timeline for accomplishing specific goals. Need help? I am happy to talk.

 

Most Common Behavioral Biases in Investors

 

Ambiguity Aversion

Dislike of ambiguity, masked as risk aversion, drives decisions.

Anchoring and Adjustment

Latching on to a specific price and make subsequent investing decisions based on that, for example, "I will sell (or buy) abc stock when it reaches a certain price."

Availability

Estimating the probability of an outcome based on how prevalent or familiar that outcome appears in their own lives.

Cognitive Dissonance

This happens when newly-acquired information conflicts with a person's understanding or beliefs. Investors with this tendency often go to great lengths to rationalize their investment decisions.

Confirmation

Holding perceptions and emphasize ideas that confirm their beliefs, while devaluing information that contradicts their beliefs.

Conservatism

Clinging to prior views of forecasts and resists new information.

Endowment

Endowing assets that one owns with higher value and sets a higher minimum selling price for those assets than what one would be willing to pay for the same or corresponding assets.

Framing

Responding to various situations differently based on the context in which the choice is presented or framed.

Hindsight

Perceiving an event to have been predictable, even if it was not.

Illusion of Control

Believing  one can control or at least influence outcomes when, in fact, one cannot.

Mental Accounting

Tendency to evaluate economic outcomes based on the origin of the money (e.g., work, inheritance, bonus, etc.) rather than on a holistic view of the assets.

Optimism

Overly optimistic about the markets, the economy and the potential for positive performance of their investments.

Overconfidence

An unwarranted faith in one's intuitive reasoning, judgments and cognitive reasoning as well as an overestimation of their own predictive abilities and the precision of the information on which they base their decisions.

Recency

Recalling and emphasizing recent events and observations more prominently than those that occurred in the near or distant past.

Regret Aversion

Avoiding decisive action because of the fear that whatever course is taken will prove less than optimal.

Representativeness

Perceiving probabilities and odds that reinforce their own pre-existing ideas even when they are statistically invalid.

Self-Attribution

Crediting one's successes to one's own talent or foresight, while blaming failures on outside influences, such as bad luck.

Self-Control

The human tendency to consume today at the expense of saving for tomorrow.

Status Quo

Predisposition to elect whatever option ratifies or extends the existing condition.

 

 

With Credit to: D. Hirschleifer, 2001, Investor Psychology and Asset Pricing, Journal of Finance, V. 56.

 

Take Control. Don't Leave Finances to Chance.

 

 

Kathleen Nemetz, MBA, CFP, CDFA™

Financial Advisor

 

McClurg Capital Corp.
950 Northgate Drive Ste. 301
San Rafael, CA 94903

415.472.1445 x 306

knemetz@mcclurgcapital.com

CA ins. lic. 0E71423

 

 

 

 

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