Within the article, Morris talks specially with one of the financial industries best (in our view), Barry Ritholtz of Fusion IQ and author of The Big Picture blog site. (which we reference frequently)
Here are a few of Morris's bullet from his piece here
- Some of our biases are harder to counter than simply changing the frame of the question. In Nobel Prize winner Daniel Kahneman’s Thinking, Fast and Slow, he describes how our brains suffer from overconfidence. This is not so much cockiness—though that’s part of it—as it is our tendency to believe past behaviour to be much more reliable as a predictive factor than we should, and to construct narratives to explain complex phenomena like the stock market even though there are far too many variables affecting a stock’s behaviour for us to really account for.
- Another common mistake investors make is to fall prey to what behavioural economists call the recency effect. When a particular investing strategy or market indicator has been successful recently, that is what will come to mind rather than the full panoply of strategies. Unfortunately, complex systems like the stock market produce results for a given action that, more often than not, revert to the statistical mean.
- You also need to set rules for yourself, to combat the sunk-cost fallacy. Most investors know what it feels like to research a company, from its historical earnings down to the size of its factories, and be disappointed when the share price goes in the opposite direction than they had expected. Studies show that it’s hard for our brains to let go when we’ve invested time and/or money in a stock, no matter how much it tanks. If humans were rational, the pain of writing off a loss would be equivalent to the pleasure of an equal-sized gain. But as many investors have already learned, losses are disproportionately more painful to our brains than gains are pleasurable, and many investors sell far too late.
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