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Bad Investor Behavior: Overemphasizing Experience
April 14, 2014 at 19:00 PM EDT
John Keats once famously noted, “Nothing ever becomes real till it is experienced.” Modern finance theory usually assumes that people are fully rational, incorporating all available information instantaneously into their expectations. Yet researchers have discovered that our personal experiences disproportionately impact our expectations about the future and risk taking behavior. In other words, we often overweight our own personal experiences at the expense of broader and often more objective and accurate information. Below, I examine the evidence behind, and implications of, this bad investing behavior, and what investors can do to try to overcome it. Q: What is the evidence on how personal experiences affect our investment decisions? A: Researchers have found that our experiences have a disproportionate impact on how much we save for retirement, our willingness to repurchase a given stock, our propensity to participate in initial public offerings and our portfolio diversification decisions. Based on data from [...] Click here to read the original article on ETFdb.com. Related Posts: No Related Posts
John Keats once famously noted, “Nothing ever becomes real till it is experienced.” Modern finance theory usually assumes that people are fully rational, incorporating all available information instantaneously into their expectations. Yet researchers have discovered that our personal experiences disproportionately impact our expectations about the future and risk taking behavior. In other words, we often overweight our own personal experiences at the expense of broader and often more objective and accurate information. Below, I examine the evidence behind, and implications of, this bad investing behavior, and what investors can do to try to overcome it. Q: What is the evidence on how personal experiences affect our investment decisions? A: Researchers have found that our experiences have a disproportionate impact on how much we save for retirement, our willingness to repurchase a given stock, our propensity to participate in initial public offerings and our portfolio diversification decisions. Based on data from [...]
