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Investing Basics: Six Ways to Outsmart Your Ape Brain
Don't let these common behaviors drive your investing decisions.
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Avoid: Addiction Bias
This is a behavior most common among traders or casual investors who dabble in stocks. It's easy to fall into patterns and start getting addicted to trading the same stocks day in and day out. "As traders, we often hold onto the memories of our trades," says Sadana, "any subsequent positions in these stocks are often colored by those memories." The best way to kick an addiction to familiar stocks is to keep a trading log to give you a better idea of how your portfolio is performing overall and to more easily identify the stocks that might be pulling you down at any given time.
The Fix: Sadana suggests creating a set of rules for your trades -- set a minimum time period for staying out of a certain stock so that you don't take up the position again too quickly.
5. Stand Alone From the Pack
Avoid: Herding Bias
Some of us follow the crowd our whole lives, while others find a way to stand out -- when it comes to investing it's better to stray from the pack. "When everybody is looking in the same direction, no one is really seeing," says Dr. Janice Dorn, a board-certified psychiatrist and active trader based in Phoenix, Arizona, who adds that this bias comes from when we were cavemen and gathered in packs to survive. "Those investors that succeed are the ones that are able to look over the heads of the herd."
The Fix: Dorn says not to be afraid to use contrary thinking. Use times when there is massive buying or selling on the market to evaluate whether or not the crowd is making sense; pay particular attention to whether the trading action looks like a top or a bottom.
6. Remove Temptation
Avoid: Restraint Bias
Oscar Wilde said, "I can resist anything except temptation," and he was probably right. Like that piece of chocolate cake in the company cafeteria or the newest gadget from Apple (AAPL), some stocks are just hard to stay away from, even if you know that they won't mesh well with the rest of your portfolio. "At such times, we overestimate our capability to resist temptation," says Sadana, explaining restraint bias, or an inflated sense of self-control. "And hence, avoiding temptation is easier than overcoming it."
The Fix: The best way to overcome a restraint bias is to completely stay away from stocks that you know you shouldn't be investing in. That means avoiding any literature on those stocks, turning down the television when they're discussed, and training your brain to avoid the subject in its entirety.
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