March 31, 2016

Investor (Mis)behavior

A well-written recent New York Times article seeks to elucidate the causes of investor (mis)behavior through recent research into behavioral finance.  In the article, the author, Gary Belsky, details five cognitive biases that are hard-wired into human brains.  These biases form the basis for investor (mis)behavior that various studies have shown causes investors to systematically underperform market averages[1].

The cognitive biases discussed were Overconfidence, Optimism Bias, Hindsight Bias, Attribution Bias and Confirmation Bias.

Awareness and acceptance of our cognitive biases is a key factor in mitigating the effects of our mental errors, empowering us to become more successful investors.

[1] In a 2004 paper, “What are Stock Investors’ Actual Historical Returns? Evidence from Dollar-Weighted Returns”, Emory University Professor Ilia Dichev, found that investors earned 1.3% per year less than the NYSE/AMEX over the period 1926-2002.