Common Investor Biases and Where They Come From
Authors:
Michael J. Mauboussin
Dan Callahan, CFA
- Humans are social and generally want to be part of the crowd. Studies of social conformity suggest that the group’s view may shape how we perceive a situation. Those individuals who remain independent show activity in a part of the brain associated with fear.
- We are natural pattern seekers and see them even where none exist. Our brains are keen to make causal inferences, which can lead to faulty conclusions.
- Standard economic theory assumes that one discount rate allows us to translate value in the future to value in the present, and vice versa. Yet humans often use a high discount rate in the short term and a low one in the long term. This may be because different parts of the brain mediate short- and long-term decisions.
- We suffer losses more than we enjoy gains of comparable size. But the magnitude of loss aversion varies across the population and even for each individual based on recent experience. As a result, we sometimes forgo attractive opportunities because the fear of loss looms too large.
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