You’re only human: An economist explains how it hurts your portfolio

Paul FennerPortfolio Management

More and more a very important aspect of portfolio management is the psychological or behavioral side of investing.  Put another way understanding how your emotions, biases, and mode of thinking affect how you invest your assets.

Richard Thaler professor of the Booth School of Business at the University of Chicago is widely considered to be the father of behavioral economics.  Thaler who is out with a new book titled Misbehaving, The Making of Behavioral Economics, (I am currently reading) sat down with Barry Ritholtz for an interview.  Barry’s full article can be read here with a few key takeaways below.

  • Endowment effect, valuing an asset that you already own higher than ones you do not own
  • Loss aversion, people feel the pain of loss about twice as much as they derive pleasure from gains
  • Hindsight bias, i.e. being on the right side a price collapse when you most certainly were not