Friday, September 16, 2011

What Investors Really Want: A blog by Meir Statman

What Investors Really Want: A blog by Meir Statman:

I was looking for material for class the other day and found this. (we never got to it in class but will soon!)

Amidst a very informative discussion on the reason for a reluctance to "break the buck" in money market accounts and the resulting flawed accounting system, Statman brings the discussion to behavioral biases:
"Losses make us feel stupid. Hindsight error misleads us into thinking that what is clear in hindsight was equally clear in foresight. We bought the stock at $100 because, in foresight, it seemed destined to go to $150. But now, in hindsight, we remember all the warning signs displayed in plain sight on the day we bought our stock. Interest rates were about to increase. The CEO was about to resign. A competitor was ready to introduce a better product.

The cognitive error of hindsight is accompanied by the emotion of regret. We kick ourselves for being so stupid and contemplate how much happier we would have been if only we had kept our $100 in our savings account or invested it in another stock that zoomed as our stock plummeted."

Meir Statman is a true expert on behavioral finance. If you have not read his book, I HIGHLY recommend it.
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