Individual investors continually make bad choices, which lead to poor investment performance.
Investor behavior is not simply buying and selling at the wrong time, it is the psychological traps, triggers and misconceptions that cause investors to act irrationally. That irrationality leads to buying and selling at the wrong time which leads to underperformance. There are nine distinct behaviors that tend to plague investors based on their personal experiences and unique personalities.
- Loss Aversion – Expecting to find high returns with low risk
- Narrow Framing – Making decisions without considering all implications
- Anchoring – Relating to the familiar experiences, even when inappropriate
- Mental Accounting – Taking undue risk in one area and avoiding rational risk in others
- Diversification – Seeking to reduce risk, but simply using different sources
- Herding – Copying the behavior of others in the fact of unfavorable outcomes
- Regret – Treating errors of commission more seriously than errors of omission
- Media Response – Tendency to react to news without reasonable examination
- Optimism – Belief that good things happen to me and bad things happen to others
