Trading and investing is a lot about #psychology
But how can we deal with this and make better decisions?
I've gathered 40 psychological traits that can lead to harmful mistakes in #trading and #investing
And what to do about them!
Time to dig deep and learn
⬇️🧐⬇️🧐⬇️🧐⬇️
But how can we deal with this and make better decisions?
I've gathered 40 psychological traits that can lead to harmful mistakes in #trading and #investing
And what to do about them!
Time to dig deep and learn
⬇️🧐⬇️🧐⬇️🧐⬇️
1 "Mental boxes"
We tend to categorize different phenomena into categories instead of optimizing overall performance, optimizing "one "box" at a time. This is especially true, when get a loss. Instead of taking loss, we accept that "one box"
Think outside the mental box!
We tend to categorize different phenomena into categories instead of optimizing overall performance, optimizing "one "box" at a time. This is especially true, when get a loss. Instead of taking loss, we accept that "one box"
Think outside the mental box!
2 "Magical thinking"
We tend to believe that some behaviour will lead to some result without having any actual reasons as to why this should happen. Hint is here that there might actually be an explaination.
Try to find it and wish for less magic!
We tend to believe that some behaviour will lead to some result without having any actual reasons as to why this should happen. Hint is here that there might actually be an explaination.
Try to find it and wish for less magic!
3 "Social facilitation"
Your performance in decision making and being a great part-time investor can either increase or decrease with help from other people - or their mere presence.
Find out whether your perform best on your own or not!
Your performance in decision making and being a great part-time investor can either increase or decrease with help from other people - or their mere presence.
Find out whether your perform best on your own or not!
4 "Endowment effect"
We overvalue and overestimate things we found ourselves. The personal attachment becomes our challenge especially when we are wrong and now have a hard time accepting it.
Try to zoom out and forget about who came up with the idea!
We overvalue and overestimate things we found ourselves. The personal attachment becomes our challenge especially when we are wrong and now have a hard time accepting it.
Try to zoom out and forget about who came up with the idea!
5 "FEAR"
If act in fear we act without proper clear thinking and your amygdala starts to control your actions. Fear will make your lose control and thus lead to irrational behaviour.
My advice: never play with leverage and never play too big amounts for you to handle!
If act in fear we act without proper clear thinking and your amygdala starts to control your actions. Fear will make your lose control and thus lead to irrational behaviour.
My advice: never play with leverage and never play too big amounts for you to handle!
6 "Assimilation bias"
Our perceptions of new evidence can be interpreted in such a way as to be assimilated into preexisting assumptions and expectations.
Forget what you know, try to work without assumptions!
Our perceptions of new evidence can be interpreted in such a way as to be assimilated into preexisting assumptions and expectations.
Forget what you know, try to work without assumptions!
7 "Hindsight bias"
We overestimate our ability to act and predict events in hindsight. I hear this all the time on Twitter and it does nothing good for any portfolio return.
Try to be present and rational in every decision and admit your limitations!
We overestimate our ability to act and predict events in hindsight. I hear this all the time on Twitter and it does nothing good for any portfolio return.
Try to be present and rational in every decision and admit your limitations!
8 "Ambiguity effect"
A classic cognitive bias towards bad decision making due to a lack of information. The probability of a favorable outcome can be unknown ("ambiguous") due to insufficient information.
Do more research from more angles! Always consider both sides of a case!
A classic cognitive bias towards bad decision making due to a lack of information. The probability of a favorable outcome can be unknown ("ambiguous") due to insufficient information.
Do more research from more angles! Always consider both sides of a case!
9 "Affect heuristics"
In nature making decisions based on affect is a brilliant shortcut based on feelings. But in investing it is one of the worst enemies.
Try to control your emotions, delay any sell or buy decision and think twice!
In nature making decisions based on affect is a brilliant shortcut based on feelings. But in investing it is one of the worst enemies.
Try to control your emotions, delay any sell or buy decision and think twice!
10 "Confirmation bias"
We sort out information and recall events in favor of our prior beliefs. This is a quick path to irrationality in markets.
Use valuation methods with arguments against your own.
If it's a clear no brainer for you, remember it's clearly not for others!
We sort out information and recall events in favor of our prior beliefs. This is a quick path to irrationality in markets.
Use valuation methods with arguments against your own.
If it's a clear no brainer for you, remember it's clearly not for others!
11 "Commitment effect"
We lose flexibilty in our decision making, when we tell people about specific investments and this makes us more committed to any good or bad decision.
Figure out ways of revealing less strong views on investments to people!
We lose flexibilty in our decision making, when we tell people about specific investments and this makes us more committed to any good or bad decision.
Figure out ways of revealing less strong views on investments to people!
12 "Depression"
In a state of depression every information and decision is perceived as worse and cause more concern than it should.
Never invest money if you feel depressed.
Buy something to cheer you up, not stocks!
In a state of depression every information and decision is perceived as worse and cause more concern than it should.
Never invest money if you feel depressed.
Buy something to cheer you up, not stocks!
13 "Ego depletion"
Ego depletion is the loss of mental awareness and can be caused by complex tasks, physical fatigue or mental depletion. Some investments require a lot of thinking.
If you're unaware and depleted the best investment advice is to get some rest.
Ego depletion is the loss of mental awareness and can be caused by complex tasks, physical fatigue or mental depletion. Some investments require a lot of thinking.
If you're unaware and depleted the best investment advice is to get some rest.
14 "Disjunction"
Disjunction can lead to pushing off ideas and investments due to a lack of information that is in fact irrelevant for the decision.
Avoid giving too much attention to details and getting lost in the process.
Disjunction can lead to pushing off ideas and investments due to a lack of information that is in fact irrelevant for the decision.
Avoid giving too much attention to details and getting lost in the process.
15 "Contrast bias"
We mentally upgrade or downgrade contrasting viewpoints. This way it's easier to point out something wrong in contrast to something right. But things are almost never that far apart.
Try not to point out right/wrong in any investment. Work with possibilities
We mentally upgrade or downgrade contrasting viewpoints. This way it's easier to point out something wrong in contrast to something right. But things are almost never that far apart.
Try not to point out right/wrong in any investment. Work with possibilities
16 "Over confidence"
We overestimate our own ability to make great investment decisions. This leads to worse investing.
Be a humble learner and don't expect to be right all the time!
We overestimate our own ability to make great investment decisions. This leads to worse investing.
Be a humble learner and don't expect to be right all the time!
17 "Panic"
Panic can be a driving force for bad decision making - including in investing. In a state of panic we rush to act without using any analytical part of the brain.
If investing makes you panic even a little, rethink how and why you invest!
Panic can be a driving force for bad decision making - including in investing. In a state of panic we rush to act without using any analytical part of the brain.
If investing makes you panic even a little, rethink how and why you invest!
18 "Linear thinking"
We view graphs, numbers and tendencies in straight lines because it makes a bit more sense than S-curves, exponential curves or gradual decline.
Find the right slope of things or the best guesstimate of that slope!
We view graphs, numbers and tendencies in straight lines because it makes a bit more sense than S-curves, exponential curves or gradual decline.
Find the right slope of things or the best guesstimate of that slope!
19 "Knowledge distribution"
Like "mental boxes" we tend to boil down information to less complex pieces and metrics, we can use for valuation. This is wrong but saves you 400 variables including time.
Boil down the numbers but try to use a wider range of comparable companies!
Like "mental boxes" we tend to boil down information to less complex pieces and metrics, we can use for valuation. This is wrong but saves you 400 variables including time.
Boil down the numbers but try to use a wider range of comparable companies!
20 "Self realization"
We tend to do things because we feel it "makes" us something or someone. Decisions based on self realization doesn't have to be bad, but in investing that feeling doesn't help you much.
Be a smart investor, don't just feel like it!
We tend to do things because we feel it "makes" us something or someone. Decisions based on self realization doesn't have to be bad, but in investing that feeling doesn't help you much.
Be a smart investor, don't just feel like it!
21 "Playing with house money"
When we unrealized or realized gains from investing this can make us take bigger risks and "gamble". Investing is all about risk and playing with house money can be dangerous.
Pretend you realized less and act like it's a new investment.
When we unrealized or realized gains from investing this can make us take bigger risks and "gamble". Investing is all about risk and playing with house money can be dangerous.
Pretend you realized less and act like it's a new investment.
22 "Persuasion effect"
In investing we'd much rather listen to a nice person than a nice argument. That way we forget that we're the ones responsible for making decisions if we don't pay a professional.
Listen to facts and arguments not specific people or communities!
In investing we'd much rather listen to a nice person than a nice argument. That way we forget that we're the ones responsible for making decisions if we don't pay a professional.
Listen to facts and arguments not specific people or communities!
23 "Cognitive dissonance"
Cognitive dissonance is the feeling of holding conflicting ideas and can confuse us and make us emotional.
Find out what is important for you in a decision and avoid mixed feelings!
Cognitive dissonance is the feeling of holding conflicting ideas and can confuse us and make us emotional.
Find out what is important for you in a decision and avoid mixed feelings!
24 "Less is more"
Some decision strategies can yield more accurate judgments than alternative strategies with more pieces of information.
Try not to overcomplicate your model of valuation!
Some decision strategies can yield more accurate judgments than alternative strategies with more pieces of information.
Try not to overcomplicate your model of valuation!
25 “Less is better”
The effect occurs when a smaller alternative of a proposition is preferred when evaluated separately and not together.
Find the bigger picture whether it’s good or bad.
The effect occurs when a smaller alternative of a proposition is preferred when evaluated separately and not together.
Find the bigger picture whether it’s good or bad.
26 “Spacing effect”
The spacing effect occurs when you study material over long time periods. It gives the mind time to form connections between ideas and concepts.
Take your time!
The spacing effect occurs when you study material over long time periods. It gives the mind time to form connections between ideas and concepts.
Take your time!
27 “Projection”
When we make mistakes we tend to blame other people, events or objects.
Try to learn from your mistakes and don’t blame people for losing money.
When we make mistakes we tend to blame other people, events or objects.
Try to learn from your mistakes and don’t blame people for losing money.
28 “Rationalization”
We often attempt to explain or justify behaviour with logical reasons, even if these are not appropriate.
Not every event has an explanation so don’t try to find one.
We often attempt to explain or justify behaviour with logical reasons, even if these are not appropriate.
Not every event has an explanation so don’t try to find one.
29 “Prospet theory”
Investors value gains and losses differently, placing more weight on perceived gains versus perceived losses. This is dangerous.
“Rule #1 - never lose money” by you know who!
Investors value gains and losses differently, placing more weight on perceived gains versus perceived losses. This is dangerous.
“Rule #1 - never lose money” by you know who!
30 “Loss aversion”
Loss or risk aversion can lead to a focus on capital preservation rather than actual investing.
Usually that is not bad but try to find the risk/reward balance.
Loss or risk aversion can lead to a focus on capital preservation rather than actual investing.
Usually that is not bad but try to find the risk/reward balance.
31 “Repression”
Bad memories can become part of your unconsciousness and influence your decisions.
Don’t let your (or anybody else's) past blur the present!
Bad memories can become part of your unconsciousness and influence your decisions.
Don’t let your (or anybody else's) past blur the present!
32 “Selective exposure”
Seen often on Twitter we tend to favor information that reinforces our pre-existing views while avoiding contradictory information.
Don’t ignore valuable facts, embrace them.
Seen often on Twitter we tend to favor information that reinforces our pre-existing views while avoiding contradictory information.
Don’t ignore valuable facts, embrace them.
33 “Self-defence”
We adjust our standpoint, so it fits our good or bad decisions. It is a quick fix to make us look smart.
Again, be smart, don’t just look smart.
We adjust our standpoint, so it fits our good or bad decisions. It is a quick fix to make us look smart.
Again, be smart, don’t just look smart.
34 “Sunk cost fallacy”
Based on feelings such as anger and revenge we tend to throw “good money after bad” trying to turn around a losing position.
Let go of your loser and keep your winners instead!
Based on feelings such as anger and revenge we tend to throw “good money after bad” trying to turn around a losing position.
Let go of your loser and keep your winners instead!
35 “Certainty bias”
In investing we value certainty over uncertainty in many ways and sometimes for the worse.
Find your best expected pay off over time!
In investing we value certainty over uncertainty in many ways and sometimes for the worse.
Find your best expected pay off over time!
36 “False consensus”
If a group of people agree on something we tend to agree as well and overestimating how many shares the same view.
Beware of group think!
If a group of people agree on something we tend to agree as well and overestimating how many shares the same view.
Beware of group think!
37 “Anchoring”
We tend to adjust our views based on a reference point (anchor). From highs or lows we convince ourselves that future prices must be around that point.
Try not to look at a price before the business!
We tend to adjust our views based on a reference point (anchor). From highs or lows we convince ourselves that future prices must be around that point.
Try not to look at a price before the business!
38 “Google effect”
Aka. digital amnesia makes us forget information that is easily accessible online. This can lead to caring less about key pieces.
Remember the important numbers!
Aka. digital amnesia makes us forget information that is easily accessible online. This can lead to caring less about key pieces.
Remember the important numbers!
39 “FOMO”
We can experience anxiety about exciting investments that may be happening elsewhere, often aroused by posts seen on Twitter.
Focus to find a few winners, not all!
We can experience anxiety about exciting investments that may be happening elsewhere, often aroused by posts seen on Twitter.
Focus to find a few winners, not all!
40/ “Worse-than-average”
In many situations we underestimate our own performance in relation to others.
Don’t underestimate your own capabilities.
You got this!
In many situations we underestimate our own performance in relation to others.
Don’t underestimate your own capabilities.
You got this!
Thanks a lot for reading this far!
If you got through it all you probably deserve more credit than you'd give yourself.
Feel free to share the post or provide critique/mistakes!
🙌🙌🙌🙌🙌
If you got through it all you probably deserve more credit than you'd give yourself.
Feel free to share the post or provide critique/mistakes!
🙌🙌🙌🙌🙌
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