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50 Cognitive Distortions

Posted By Barry Ritholtz On April 7, 2013 @ 3:00 pm In Markets,Psychology,Rules,Trading | Comments Disabled


I stumbled across this interesting and exhaustive list of common cognitive [1] distortions. It should come as no surprise that quite a few of these are applicable to investors.

Here are a few that I found relevant:

3. Negative predictions: Overestimating the likelihood that a market or economic report will have a negative outcome.

7. Negatively biased recall: Remembering negatives while ignoring positives.

19. Basing future decisions on “sunk costs.” e.g., investing more money in a business that is losing money because you’ve invested so much already.

20. Delusions: Holding a fixed, false belief despite overwhelming evidence to the contrary.

23. The Halo Effect [2]: Perceiving qualities to one company due to its association with another (ie, JC Penney’s CEO was Apple’s former head of Retail).

27. Overgeneralizing [3] Generalizing a belief that may have validity in some situations to every situation.

32. Overvaluing things because they’re yours.: e.g., perceiving your portfolio holdings as more attractive because they are yours. Or, overestimating the value of your home when you put it on the market for sale.33. Failure to consider alternative explanations: Coming up with one explanation for why something has happened/happens and failing to consider alternative, more likely explanations.

34. The Self-Serving Bias [4] The self-serving bias is people’s tendency to attribute positive events to their own skills but attribute negative events to external factors. (See these Tips for overcoming the self-serving bias. [4])

36. Failure to consider opportunity cost: There is a cost to every holding you have, as that capital could be deployed in productive uses.

39. “You don’t know what you don’t know.”  Having a 3rd party provide an outsiders perspective can help you avoid being blindsided by whats outside of your understanding.

41. The belief that more information and analysis will lead to problem solving insight:  Excess information often leads to excess confidence and poor decision making.

43. The Peak-End Rule: The tendency to most strongly remember (1) how you felt at the end of a trade, or (2) how you felt at the moment of peak emotional intensity during the trade. Biased memories [5] can lead to biased future investment decision making.

44. The tendency to prefer familiar things: Familiarity breeds liking. Think about why people tend towards certain stocks or sectors or assets — its often the familiarity as opposed to something intrinsic about those holdings.

47. Positively biased predictions: Once you commit capital to a given investment, you can easily allow your hopes and desires for it succeed to interfere with your ability to objectively evaluate it.

49. Repeating the same behavior and expecting different results (or thinking that doubling-down on a failed strategy will start to produce positive results).  What more does anyone need to say about doubling down on bad trades?

Do you engage in any of these Cognitive Distortions ?
50 Common Cognitive Distortions [6]
By Alice Boyes, Ph.D.
Psychology Today Jan 17 2013


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URL to article: http://www.ritholtz.com/blog/2013/04/50-cognitive-distortions/

URLs in this post:

[1] cognitive: http://www.psychologytoday.com/basics/cognition

[2] The Halo Effect: http://www.psychologytoday.com/blog/the-science-willpower/201106/are-you-making-these-two-dieting-mistakes

[3] 27. Overgeneralizing: http://www.aliceboyes.com/overgeneralization-psychology/

[4] The Self-Serving Bias: http://www.psychologytoday.com/blog/in-practice/201301/the-self-serving-bias-definition-research-and-antidotes

[5] memories: http://www.psychologytoday.com/basics/memory

[6] 50 Common Cognitive Distortions: http://www.psychologytoday.com/blog/in-practice/201301/50-common-cognitive-distortions

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