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Looking Beyond The Obvious: The Psychology Of Successful Investing

Jul. 17, 2017 3:56 AM ET
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“Phrenology” by Ryan Somma

There are a million and one theories about the best strategy investment, often completely contradictory but held in equally high esteem by their proponents. For example, some believe that the bear market's the time to make hay as prices fall and there are bargains to be had while others think that if it's not a bull market then they'll hold tight till it becomes one. Others like the much-quoted Warren Buffett believe that it's simply a question of maintaining the self-control to avoid making the sorts of decisions that may seem obvious, but on closer or more objective inspection, may be potentially disastrous.

Underlying the latter position is a profound understanding of the psychological aspects of developing an effective investment strategy and the more you can understand about human inclinations and how to harness them, the better it will serve you. This is equally applicable whether you're considering stock options or investing in indices as the natural motivations remain very much the same.

One of the most common psychological traits that comes into play is overconfidence. A natural facet of many of us, especially when things are going well, it can also lead to one of the most damaging psychological states for investing. It can come from previous experience and often also goes hand in hand with selective memory. In this we put on our rose-tinted spectacles and re-imagine trades that went well as going spectacularly while pushing those which failed to deliver their promise to the back of our minds. Both of these areas have been extensively studied in a field called behavioural finance and how it can affect everything from FTSE investment to the typical sequence of emotions experienced by investors.

The root of the issue lies in the fact that we like to

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