Posts filed under “Rules”

50 Cognitive Distortions


I stumbled across this interesting and exhaustive list of common cognitive 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: 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 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 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.)

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 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
By Alice Boyes, Ph.D.
Psychology Today Jan 17 2013

Category: Markets, Psychology, Rules, Trading

12 Cognitive Biases That Endanger Investors

Before Todd Harrison created Minyanville, he was an options trader at Morgan Stanley, eventually becoming President of Cramer Berkowitz, where he toiled as head trader at Jim Cramer’s hedge fund. Todd has an excellent analysis of the various biases that endanger investors. Here is the full list: 1. Confirmation Bias 2. In-Group Bias 3. Gambler’s…Read More

Category: Markets, Psychology, Rules

Investing/Trading Rules, Aphorisms & Books (Spring 2013)

Way back in 2011, we pulled together a run of some of the Trading Rules & Aphorisms that show up on the site. It turned out to be a popular post, and I added “Rules” as a new category.

Thus, we update this semi- annually. These are my traders, analysts, economists and investors views’ on what to do — and what not to do — when it comes to markets that have been published on TBP.

Here is the latest update:

Trading & Investing Rules, Aphorisms & Books

Sir John Templeton 16 Rules For Investment Success

10 Lessons from 1987 Market Crash

Livermores Seven Trading Lessons

Bob Farrell’s 10 Rules for Investing

James Montier’s Seven Immutable Laws of Investing

Richard Rhodes’ 12 Trading Rules

John Murphy’s Ten Laws of Technical Trading

Six Rules of Michael Steinhardt

Nassim Taleb’s 5 Rules of Volatility

Morgan Housel’s 9 Financial Rules

David Merkel: The Eight Rules of My Investing

Art Huprich’s Market Truisms and Axioms


Rosie’s Rules to Remember

Louis Ehrenkrantz’ 7 Golden Rules for Investing

In Defense of the “Old Always” (Montier)

Lessons from Merrill Lynch

Lessons Learned from 37 Years of Futures Trading

Richard Russell’s The Power of Compounding

The golden rules of investing (India)

25 Common Sense Money Tips

Dan Bunting’s Laws of Investing

Cassandra’s (Not so) Golden Rules About Investing (& Not Investing)


If you have any suggestions for any good lists of rules I may have missed, please link to them in comments. If they are worthy, they will get added to the list.

My own trading rules and favorite Trading Books are after the jump

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Category: Apprenticed Investor, Investing, Rules, Trading

Keep Investing Simple

Keep it simple, avoid the pitfalls Barry Ritholtz Washington Post, January 25 2013       “A simple, albeit less than optimal, investment strategy that is easily followed trumps one that will be abandoned at the first sign of under-performance.”   That’s from Tadas Viskanta of Abnormal Returns, a “forecast free” investment blog. He was…Read More

Category: Apprenticed Investor, Investing, Rules

10 Ways to Simplify Your Investing

My Sunday Washington Post Business Section column from yesterday — Keep it simple, avoid the pitfalls — described 10 ways to keep your investing simple. Here are my 10 (plus 2 corollaries) Simplify Your Investing 1 Go passive. 2 Diversify across asset classes. 3 Be mindful of valuation. 4 Dollar cost averaging. 5 Keep costs…Read More

Category: Apprenticed Investor, Rules

Simplifying Your Investment Strategy


My Sunday Washington Post Business Section column is out. This morning, we look at the advantages of avoiding complexity in your investment process. The print version had the simple headline Simplifying Your Investment Strategy while the online version used the hedder Keep it simple, avoid the pitfalls.

There are know advantages to certain complex investing strategies, but these complexities become harmful disadvantages most of the times, as Humans are emotionally unable to follow them.

By creating an investment plan that is simple and easy to follow, you make it more likely that you will ultimately succeed and reach your goals. Hence, all of the familiar themes get mentioned in my focus on simplicity: ETFs, lower costs, diversification, rebalancing, dollar cost averaging, etc.

Here’s an excerpt from the column:

We must recognize our own behavioral errors. To be blunt, you are not likely to become a cognitive Zen master anytime soon. But a little enlightenment could keep you from making some common investing errors.

Knowing these limitations, we can design an investment plan to circumvent the behavioral pitfalls. And a good step is to simplify. Toward that end, keep these 10 ideas in mind when approaching your portfolio”

The 10 ideas are not groundbreaking — but they are often overlooked.

Less can be more.


Keep it simple, avoid the pitfalls
Barry Ritholtz
Washington Post, January 25 2013

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Category: Apprenticed Investor, Index/ETFs, Investing, Rules

Reality Check: What Are You Lying to Yourself About?

  Michael: I don’t know anyone who could get through the day without two or three juicy rationalizations. They’re more important than sex. Sam: Ah, come on. Nothing’s more important than sex. Michael: Oh yeah? Ever gone a week without a rationalization? -The Big Chill     One of the things we all do as…Read More

Category: Apprenticed Investor, Psychology, Rules

Keep It Simple

Keep it simple, avoid the pitfalls Barry Ritholtz, Washington Post, January 25 2013     “A simple, albeit less than optimal, investment strategy that is easily followed trumps one that will be abandoned at the first sign of under-performance.”     That’s from Tadas Viskanta of Abnormal Returns, a “forecast free” investment blog. He was…Read More

Category: Apprenticed Investor, Investing, Rules

Keep Investing Simple

Its the start of the new year, and most of you have been thinking about some grandiose plan for self-improvement. Quit smoking, lose weight, clean out the basement, exercise, spend more time with family and friends, floss. May I suggest taking control of your portfolio as a worthwhile goal this year? I have been thinking…Read More

Category: Investing, Psychology, Rules, Trading

Ritholtz’s Dozen Rules for Investors

These were my rules I pulled together for the Washington Post: 1. Cut your losers short, and let your winners run. 2. Avoid predictions and forecasts 3. Understand crowd behavior. 4. Think like a contrarian (but don’t always act like a contrarian). 5. Asset allocation is crucial. 6. Decide if you are an active or…Read More

Category: Investing, Rules