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March 15, 2019 
 
Here's why we make lousy decisions and
what we could do about it          
 
 
 
It's no secret that we all have biases. Some biases are innate and some are learned responses to negative inputs. Some are quite clearly harmful and some aren't. Human judgement can't help but use biases kind of like a filtration system when taking in information. In other words, we see things through different lenses; a prism of sorts. No two people's biases are exactly alike. Like the old expression goes, "we see things differently". Another way to say it is "everyone has different judgement, some better and some worse". Biases are always at work, but some people have greater self-awareness over their biases than others. That's the point of this post. 
 
This brings me to behavioral finance, which is a relatively new field that combines behavioral and cognitive psychological theory with conventional economic theory in order to propose explanations about why people make irrational decisions. By irrational, I mean dumb. Investopedia has a great course on the subject. I highly recommend it to anyone who wants to improve their decision making abilities. It's fairly brief too:  Behavioral Finance 
 
There are a few biases that are common among investors. How do we overcome these? By becoming self-aware of what they are. Because once you realize you have them and how they impact your investing decisions, you'll have the ability to negate them. It's not easy and it takes constant reminders.  
   
From a list of "20 cognitive biases that screw up your decisions" via Business Insider, I could think of real world examples of how these biases played out to the detriment of investors' wealth.
 
 
 
The 3 rd one on the list is "Bandwagon effect". It's a powerful form of group think; when one's belief in something becomes stronger based on the number of people who share that belief. We saw this in the crypto mania late 2017, which imploded soon after.
 
The 7 th one, the one I think is most dangerous to investors and everyone else on the planet is "Confirmation bias", when people pay attention only to information that confirms their preconceptions.
 
The 12 th one is "Overconfidence". Some people are too confident in their abilities and as a result, take on risk greater than their risk tolerance. Experts are more prone to this because the see themselves as, well, as experts.
 
The 15 th one is "Recency", when investors extrapolate current stock market performance into the future. It's like thinking that the good times will roll on forever.
 
Here's the list with all 20. Take a good look at each one and think to yourself about how your understanding of them would make you a better decision maker. You don't have to study this list like a test will be handed out; just a basic understanding will help you a lot. Think of a real world experience in your life that each bias played a part in a decision you've made in the past and how the outcome would've been different if you were aware of the bias in question.
 
It's a great exercise and it doesn't take long.
 
 
New Video: 3 kinds of stocks to avoid!
 
3 kinds of stocks to avoid!
3 kinds of stocks to avoid!
 
 
My latest quote in the media: CNBC: "Investors were overly focused on risk from 2009 to 2016. And now their attitude toward risk has gone completely the other way."
 
 

ETFs vs. Mutual Funds: Which one is better?
 
ETF's vs. Mutual Funds: Which one is better? 
ETFs vs. Mutual Funds: Which one is better?
 
 
 
 I went to a LinkedIn Local event and this is what happened (Video):
 
LinkedIn Local! I went to one and it was awesome! Here's what happened. 
LinkedIn Local! I went to one and it was awesome! Here's what happened.
 
 
On another note, I'm getting my video reps in on YouTube, something I've been looking forward to doing for a long time. Please head over  there now and check out a few videos. They're all about 2 minutes in length. And while you're there, please thumbs-up the videos you like and subscribe to my channel. Thanks! 
  
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Thank you for taking the time to read this!
Mitch
 
 
I opened ClientFirst Strategy, Inc. because I believe that the only way to help my clients potentially achieve their goals is by offering unbiased advice & investment management expertise. To my clients, thank you for your continued vote of confidence. If you are not a client but would like to explore the possibility of becoming one, I invite you to call me directly, visit my website, join my email list, and/or connect with me on social media.      

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All the views expressed in this report/commentary accurately reflect our personal views about any and all of the subject securities or issuers and no part of our compensation was, is, or will be, directly or indirectly related to the specific recommendations or views we have expressed in this report. This material is not intended as an offer or solicitation for the purchase of sale of any security or other financial instrument. Securities, financial instruments, or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from securities or investments mentioned in this report may fall against your interests, and you may get back less than the amount you invested. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. You should consult with your tax adviser regarding your specific situation. Diversification is a method of managing risk and doesn't protect against loss in a down market. 
  
  

Mitchell O. Goldberg, AIF®, AAMS

President | Investment Professional

OSJ Manager 

 

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