UlTImATE SUccESS GUIdEInFoRMAtIon Is eveRYWheRe, BUt PRACtICAl
knoWleDge Is hARD to CoMe BYIn the past, stock investing was for the rich and the upper middle class. In
the 1980s and 1990s, it became everyone’s hobby, almost a recreation.
USA Today became a dumbed down version of The Wall Street Journal.
CNBC became wildly popular. The trend was everyone’s friend—the
rising tide lifted all boats. Everyone was an expert. The wealth effect
kept the economy buzzing.
When a person is working and bringing home a paycheck, market losses
and fees are ignored. The real problem is when a retired person starts
treating investing like a job. Results are expected daily, weekly, and
monthly—just like at work. Wall Street may have different ideas.
It isn’t that do-it-yourself investors aren’t smart. The problem is that
they are ruled by emotions, specifically the emotions of fear and greed.
Emotions lead to bias. Psychologists have identified three kinds of ‘bias’
that affect our decisions:
- Cognitive: decisions we make because of a lack of understanding.
- Emotional: decisions we make because of our emotional makeup.
- Social: decisions we make based on how we see ourselves in the world.
There are quite a few types of cognitive biases that have been identified
by the science of psychology. These biases are survival instincts—they
are shortcuts in thinking that can save your life, but can be the result of
errors in statistical judgment, memory, and social attribution.
“Cognitive dissonance” is one of the most well known types of cogni-
tive biases. Cognitive dissonance is very common, and just about ev-
eryone has experienced it at least once in their lives. It is the feeling of
tension or anxiety caused by holding two opposing beliefs or thoughts
at the same time. Investors are overrun by cognitive dissonance because
there are so many credible sounding and opposing opinions coming
from so many news sources, 24/7/365.
“Illusory correlation” is another one of the more commonly known
types of cognitive biases. It is very common in investing. Illusory cor-
relation describes a situation where someone perceives a correlation, or