This 33-page research report will teach you:
We poured through research on over 200+ cognitive biases to find the top 12 that hurt investors' profits.
We've distilled 15 powerful questions to help you make better investing decisions and avoid cognitive pitfalls.
This report outlines common mistakes investors make and the cognitive biases behind them.
Trading coach Van Tharp often says, “Psychology accounts for 100% of your investment success.”
As it turns out, there’s some good evidence to support his claim.
To create this report, we poured through research on over 200 psychological biases to find the ones that most impact your investing success.
Our top 12 cognitive traps cover a range of decision making, belief, social, memory, and behavioral biases.
This report is broken down in to two major sections:
The first section will cover 12 major cognitive biases that impact investors while the second section lays out 15 questions to help you overcome these biases and take your investing to the next level.
Before we dig into the 12 big cognitive traps, let’s step back and understand why they matter.
Here, we’ll cut right to the chase:
The hard truth is that despite a profitable long-term upward trend in the stock market, the average investor does not perform very well.
Unfortunately, there’s a lot of evidence showing the average investor gets tripped up by common mistakes which really hurt his long-term profits.
Let’s look first at this chart from J.P. Morgan, which shows how the average investor has performed vs. a range of other investment classes over the last 20 years.
As you can see, the results are not good. The average investor underperforms nearly every asset class on the market and just barely outpaces inflation.
How is this possible? Why does the average investor perform so poorly?
Raymond James analyzed the biggest mistakes that hold investors back and categorized them into five major areas:
While we could dig into each of these specific mistakes (and we do, in our free "How to Invest in Stocks" course), we believe that these, and many others, are driven largely by underlying cognitive traps.
It’s much more impactful to focus our energy there.
If we can help you overcome the big cognitive traps underlying these mistakes, it will take your investing to the next level.
A cognitive trap is another word for a cognitive bias, which is a well-established and well-researched area of investing psychology.
Let’s start our discussion by understanding what a cognitive bias really is.
A cognitive bias is a systematic pattern of deviation from rationality in judgment.
In the context of stock market investing, a cognitive bias is a pattern of irrational decision making that leads to a suboptimal outcome.
Put simply, cognitive biases are predictable mental mistakes that lead to poor results.
For each of the 12 cognitive biases discussed below, we provide three important insights:
With that said, let’s jump into the top 12 cognitive traps that hold investors back, beginning with the Disposition Effect.
What is it?
The disposition effect is the tendency of investors to hold on to assets that have lost value and sell assets that have gained value.
How does it apply to investing?
The disposition effect captures one of the most common scenarios we see among beginner investors.
It goes something like this:
Imagine an investor buys two stocks in his portfolio, one of which quickly goes down by -25% and the other quickly goes up 25%. The investor will mistakenly...