Tags: Kahneman | individual | investors | mistakes

Nobel Laureate Kahneman: Individual Investors Make Rookie Mistakes

By    |   Monday, 13 February 2012 07:55 AM

Profitable investing is simple in theory – buy low and sell high. But individual investors have a tough time carrying that dictum out, says Nobel laureate economist/psychologist Daniel Kahneman.

“People have little idea, by and large, of the investment world,” he tells The New York Times. “They are convinced they have an advantage.”

Individual investors err by giving in to emotions, Kahneman says.

For example, fear of losses may override rational buy and sell decisions. Often investors will cling on to an arbitrary sell target, preventing them from unloading a security when it’s most prudent.

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You must learn to mistrust your intuition, Kahneman says. He thinks individuals also often fail to take worst-case scenarios into account. “People are underinsured against extreme and unlikely possibilities.”

Many retail investors operate under the illusion that they can profit from day trading or that they have an information advantage in choosing securities, Kahneman says.

Any veteran investor can tell you that day trading is essentially gambling and that big Wall Street houses have a leg up when it comes to market-moving information.

Larry Swedroe, director of research at Buckingham Asset Management, recommends investing in passively managed funds to minimize mistakes.

“Our strategy is to avoid the typical focus on trying to manage returns, something that cannot be done, but instead focusing on the things we actually can control,” he tells Seeking Alpha. That includes risk, diversification, costs, and tax efficiency.

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Monday, 13 February 2012 07:55 AM
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