My Sunday Washington Post Business Section column is out. This morning, we look at the work of Richard Thaler, the father of Behavioral Economics. His findings are very applicable to investors.
The print version had the full headline You’re only human: How it hurts your investments; online its You’re only human: An economist explains how it hurts your portfolio.
The column uses Thaler’s work to illustrate the big disconnect between investing and human behavior. His work discerns how people behave in the real world versus the basic — and quite silly — assumptions of economics.
As it turns out, you Humans are not perfectly rational. You do all of the things that traditional economic theory suggests you should not. You react emotionally, lack patience, fail to consider consequences of your actions. You are often flummoxed by simple math.
We look at 5 of the bigger biases and judgment errors that Thaler has observed manifested in investing decisions:
1. Endowment effect
2. Sunk cost fallacy
3. Loss aversion
4. Hindsight bias
5. Doing vs. planning
Of course, the column recommends what you should do to avoid letting these cognitive errors impact your investing.
If you are more aware of your own foibles, it gives you at least a fighting chance to overcome them.
You’re only human: An economist explains how it hurts your portfolio
Washington Post, June 28, 2015