Investor behavioral biases.
Individual Investors all over are susceptible to behavioral biases.
Behavioral explanations are responsible for many of interesting findings on individual investor habits -which influence investors and distort markets. If aware of those we can reduce false biases and take advantage of market distortions. (This can be just as important then in buying good shares to begin with.)
The newer field of behavioral finance can teach us about the many fallacies, many of us have ingrained in our genes, during our long human evoltuion: These human factors include: overconfidence, loss aversion fear, endowment, prospect theory, heuristics, representativeness, anchoring, familiarity bias, framing, expert knowledge perceiving control, worry and effect, herd behavior and more.
Example:
Subjects where told a number before an experiment. This number had nothing to do with the experiment and it was obvious. Later they were asked a question which is impossible to know the answer, like how many doctors (Men and Women) live in Paris? In almost all cases the number guessed is closer to the previous number given vs. other subjects which were not given an number. I.e. The average number answered was so much closer to that number shown before, then others whom had not seen any number beforehand.
The disposition effect, a mighty important one (!), which is the often tendency to hold on to loosing stocks for too long, while selling winning stocks too early. This is arguably one fo the most studied patterns -and demise- of individual investing. One we all struggle with and must be forewarned.
We got so many other (often evolutionary) biases we are not even aware of them, but I have made a point in understanding these from reading about it and noticing it myself over the years...whenever I can stand back and ask myself why I feel this way, investor wise. And here try to warn members when such a bias comes knocking at our doors regularly. To recognize them is the key.
Best Regards,
Paul A. Renaud.
