Avoiding Common Stumbling Blocks 241for a while doesn ’ t mean it ’ s likely to move in the opposite
direction anytime soon.- Self - attribution bias. One of my favorite sayings is “ If you
blame others for your failures, do you credit them for your suc-
cesses? ” Investors like to attribute their successes to themselves
but blame losses on others. This impedes investors in two ways.- Investors can ’ t learn from their mistakes because they are
unable to see them as such. - Investors often confuse skill with luck.
- Investors can ’ t learn from their mistakes because they are
- Conservatism/confirmatory biases. Investors quickly form
opinions and then tend to overvalue information that rein-
forces those opinions and undervalue information that
undermines them. Going further, investors seek confirma-
tion of those opinions by specifically seeking out supporting
information. - Outcome bias. Many investors love to evaluate their invest-
ment decisions based on the outcome instead of the process.
If the investment was profitable, congratulations are handed
out even if the choice made was speculative or without funda-
mental merit. As a result, investors praise themselves for mak-
ing dumb choices that happen to turn out well; conversely,
they reject smart investments choices that turn out bad. Many
investors constantly reinforce mistakes and reject sound
decisions. - Hindsight bias. Hindsight bias is arguably one of the great-
est flaws of investors. When investors reflect on the past, they
often imagine that they knew what was going to happen. The
truth is that no investor knows what exactly will happen until
after it happens. Afterward, the mind thinks that it knew what
was going to happen. This hindsight bias leads investors to
become overconfident about their ability to predict what will
happen next.
Unfortunately, humans are wired at birth to succumb to these
psychological fl aws. This does not make the investor ’ s job anyCH011.indd 241CH011.indd 241 9/2/09 11:51:54 AM9/2/09 11:51:54 AM