Cognitive Biases – Ignore At Your Own Peril

31 Mar

Since I first stumbled upon it around 2 years ago, I’ve been consistently reminded (especially during these er “unique” financial times) of how important it is for every investor, nay, for anyone to be aware of the most common manifestations of human cognitive bias.

While hardly an exhaustive, academically rigorous presentation, I strongly suggest each and every one of you reads this list of cognitive biases – and even better, try to catch yourself exhibiting them.

http://en.wikipedia.org/wiki/List_of_cognitive_biases

Seriously, you don’t need a degree in Psychology to get the point.  The human brain, even the most disciplined, aware, and cognizant one is susceptible to these mental shortcuts.  The implication for investors is that once informed, we can not only catch ourselves taking these shortcuts before its too late, but more importantly, recognize when others are doing the same, and capitalize on the situation.

Yes, I just linked to Wikipedia.  If its not immediately apparent why, well, frankly, I’m not sure I can help you.

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4 Responses to “Cognitive Biases – Ignore At Your Own Peril”

  1. Kid Dynamite March 31, 2010 at 12:42 pm #

    and when it comes to investing, the biggest and most dangerous bias that most people exhibit is CONFIRMATION BIAS.. instead of trying to find out why they’re wrong, they look for other people who agree with them to tell them that they’re right…

    and there’s nothing wrong with Wiki links -if it’s on the internet, it’s 100% true.

  2. Anal_yst March 31, 2010 at 4:07 pm #

    Good looks, KD. Investors, from the novice to the seasoned professional, would be well-served to be well-acquainted with much of the list, particularly Confirmation Bias.

  3. Chopshop April 2, 2010 at 8:28 pm #

    required reading for any ‘serious’ investor and all traders ~ Mark Douglas’ ‘Trading in the Zone’.

    imo, Jonah Lehrer’s ‘The Frontal Cortex’ is the best one stop shop for a lay neuroplasticity forum.

    http://scienceblogs.com/cortex/

    am constantly asked to weigh the importance of TA against psychology and funny-mentals: while I’m almost entirely technical-oriented, there is nothing more important than practical psychology bc YOU have to decide when to press the buttons.

    though few have any clue about technical analysis, even fewer seek to study their own psychological drivers, so as to practically manage their own emotions. by definition, there is little chance this ever changes.

    just like trading without TA, a written plan and a well-defined edge, trying to manage one’s emotions w/o an understanding of HOW they operate is a one way ticket to failure.

  4. Smallville Episodes March 11, 2011 at 7:02 pm #

    My partner and I stumbled over here different page and thought I may as well check things out. I like what I see so now i’m following you. Look forward to looking over your web page for a second time.

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