Why Humans Make Bad Investors
I was recently reading an article on behavioral finance that listed some of the key reasons why we as humans make such bad investors and it reminded me a quote from Sir Isaac Newton:
“He can calculate the motions of the heavenly bodies but not the madness of people.”
He was referencing how in 1720, he lost a fortune in the South Sea Company, which was the hottest stock in England at the time (think GameStop in 2021.)
The times are dramatically different 300 years after Newton and the South Sea Company. Technology has evolved at lightning speed, however, our brains have not.
Our brains were designed to protect us from all sorts of dangers—saber-toothed tigers, woolly mammoths, suspicious looking characters on a dark street. The trouble is that these mental shortcuts that we as humans have developed to manage life-and-death scenarios are not helpful when deciding when to buy or sell a stock.
Our brains have trouble distinguishing between a bear market and a bear in the woods.
The fact that our brains are wired to protect us, often prompt us to make decisions that seem rational but are self-defeating.
One of the best ways to help protect against this behavior is to understand some of the key biases that we make as investors.
CLICK HERE to view a chart we put together that highlights 4 of the main biases we see in investors and the ways to identify said biases, in the hope that we will help educate and keep people from making these investing mistakes.
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Nick Gyeszat, CIMA®
Director of Strategic Planning