By Scott Woolley
Emotions can be expensive, especially when you start making investing decisions with your gut instead of your brain. Fortunately, there are ways to avoid--or at least limit--the mistakes that we oh-so-human investors tend to make.
Daniel Kahneman won the Nobel prize in economics seven years ago for his work on how irrational humans systematically make mistakes. Since then, research in the field of behavioural finance has exploded.
Given the recent market turmoil what common, and costly, mistakes should investors be especially vigilant to avoid making today?
One is a direct result of the stock market plunge. People who bailed out of stocks after losing as much as half of their investments are now anxiously sitting out the market recovery, says Amy Barrett, a fee-only financial adviser and director of investments at Savant Capital.
Those people have "anchored" themselves to the value of the stock market at its trough, where they bailed out. They're having a hard time accepting the fact that stocks might really be good values at their new, higher levels. In the past that behaviour has been a sure recipe for missing a market rebound, says Barrett.
"I'd like to shake these people and tell them to get out of their rut," she says.
Here are descriptions of the most common cognitive errors investors make--and some tips for getting your rational mind to override your potentially costly emotions.