Investment Madness: How Psychology Affects Your Investing...And What To Do About It

Abstract

INTRODUCTION. 1. Your Behavior Matters! Why haven't I Heard of This Before? A simple Illustration. Prediction. Behavioral Finance. The Investment Environment. Endnotes. I. NOT THINKING CLEARLY. 2. Overconfidence. Becoming Overconfident. Illusion of knowledge. Illusion of Control. Recipe for Disaster? Endnotes. 3. Overconfidence and Investing. Overconfidence: A Case Study I. Overconfidence and Trade Frequency. Gender Differences. Trading Too Much. Overconfidence and Risk. Overconfidence and Experience. Mutual Funds. Overconfidence and the Internet. Summing Up. Endnotes. 4. Status Quo - Or What I Own Is Better! Endowment Effect. Endowment and Investing. Status Quo Bias. Attachment Bias. Overcoming These Biases. Endnotes. II. EMOTIONS RULE. 5. Seeking Pride and Avoiding Regret. Disposition Effect. Do We Really Sell Winners? Selling Winners Too Soon and Holding Losers Too Long. The Disposition Effect and the Media. Avoiding the Avoiding of Regret. In Summary. Endnotes. 6. Double or Nothing. House Money Effect. Snake-Bit (Risk Aversion) Effect. Break-Even Effect. Would You Buy This IPO? The Tech Bubble. Endnotes. 7. Social Aspects of Investing. Sharing Investment Knowledge. Moving with the Hotel. Speed Is of the Essence (Not). Investment Clubs. Beardstown Ladies. Investment Club Performance. Investment Club and Social Dynamics. Summing Up. Endnotes. III. FUNCTIONING OF THE BRAIN. 8. Mental Accounting. Mental Budgeting. Matching Costs to Benefits. Aversion to Debt. Sunk-Cost Effect. Economic Impact. Mental Accounting and Investing. Endnotes. 9. Mental Accounting and Diversification. Mental Accounting and Portfolios. Risk Perceptions. Risk Perception in the Real World. Building Behavioral Portfolios. Summing Up. Endnotes. 10. That's Not the Way I Remember It. Memory and Investment Decisions. Cognitive Dissonance. Cognitive Dissonance and Investing. Cognitive Dissonance and the Steadman Funds. Memory and Socialization. Reference Points. Summing Up. Endnotes. 11. What I Know Is Better. Representativeness. Representativeness and Investing. Familiarity. Familiarity Breeds Investment. Familiarity Breeds Investment Problems. Endnotes. IV. INVESTING AND THE INTERNET. 12. The Internet (Psycho) Investor. The Rise of the Internet Investor. Amplifying Psychological Biases. Information and Control. Online Trading and Overconfidence. Advertising - Increasing the Biases. Online Trading and Performance. Day Traders - The Extreme Case. Summing Up. Endnotes. 13. Exuberance on (and about) the Net. A Rose.com by Any Other Name. A Bubble Burst. The More Things Change. The Boiler Room Goes Online. Endnotes. V. WHAT CAN I DO ABOUT IT? 14. Self-Control, or the Lack of It! Short-Term versus Long-Term Focus. Controlling Oursleves. Rules of Thumb. Environment Control. Self-Control and Saving. IRA's. 401 (k) Plans. Self-Control and Investing. Self-Control and Dividends. Summing Up. Endnotes. 15. Battling Your Biases. Strategy 1: Understand Your Psychological Biases. Not Thinking Clearly. Letting Emotions Rule. Functioning of the Brain. Strategy 2: Know Why You are Investing. Strategy 3: Have Quantitative. Investment Criteria. Strategy 4: Diversify. Strategy 5: Control Your Investing. Environment. Additional Rules of Thumb. In Conclusion. Index.

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