details evidence of the release of addiction-related dopamine in our brains when we anticipate big wins. “The dopamine rush we get from long shots is why we play the lotto, invest in IPOs, keep too much money in too few stocks, and invest with active portfolio managers instead of index funds,” Zweig states. “Our brains are wired to force us into forecasting; it is a biological imperative. In fact, humans are born with what I’ve come to call ‘the prediction addiction.’” Several researchers working in neuroeconomics, including Harvard’s Hans Breiter have identified a striking similarity between the brain’s reaction to cocaine and the prediction of financial rewards 11. Even wealthy individuals struggle with emotions management and investing discipline. A recent Barclay’s study12 found that 41% of high net worth investors wished they had more self-control over their investing decisions. The study concluded that emotional trading can cost an investor about 20% in returns over the 10-year period studied. Investors who prevented themselves from over-trading through specific strategies were, on average, 12% wealthier than those who did not use self-control mechanisms. These self-control strategies include minimizing time spent checking their portfolios or seeking advice prior to making a buy or sell decision. Several behavioral biases that affect decisions may include: • Overconfidence: People mistakenly believe they can outperform the market. • Hindsight bias: Investors think past events were predictable and obvious and believe they should have
Published on Jun 1, 2015
This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...