Musings and Amusings

Behavioral Resolutions for Behavioral Investors

The essence of being a psychologically aware investor is self-control. 

Uncertainty in a Modern World

Generally people make two sorts of investing mistakes. Firstly we make mistakes in analysis: we’re busily forecasting in a world in which the future is at best shrouded in uncertainty. We can’t possibly get all decisions correct. Secondly we make psychological mistakes: our minds betray us into making decisions in which the balance of probable outcomes lies against us. 

I Will Not Sell Winners To Buy Losers

Our number one stupid behavior is selling winners to buy losers. One of the most famous pieces of research ever done in the area, by Brad Barber and Terrance Odean, showed that overwhelmingly the stocks that internet traders sold went on to outperform the ones they purchased to replace them, an outcome of overconfidence.  

I Will Track My Returns

It’s a remarkable fact that most investors don’t know whether they’re making money or not. 

It can only be done through the simple expedient of keeping proper records. 

I Will Treat All Money As Equal

Our hatred of taking a loss and our unwillingness to track our returns means that we play mental games with our money. To be precise we allocate different sorts of money to different sorts of mental accounts, and we then use these accounts to hide away losses. 

I Will Not Listen To Fake Gods (or Experts)

In an uncertain world such as that of investing there’s not really much prospect of anyone getting short-term forecasting right on a regular basis. 

I Will Not Fall Victim To Temptation

We are all, to some extent, hobbled by our inability to stick to our resolutions. Real life keeps getting in the way. 

But There Is More To Life Than Money

Finally, though, remember that money does not make us happy. What we do with money can make us happy. Investing is a means to end. Just make sure you understand both the means and the end.

Read more about this in my book Money, Money, Money Ain't it Funny.

Source: Psy-Fi Blog