Being well-researched and prepared is a key to success in investing. But how can investors prepare for their own emotions? One of the most well-known investors of the 20th Century, Benjamin Graham, once said that "the investor's chief problem—and even his worst enemy—is likely to be himself."
What Graham understood—and modern research is catching up to—is the idea that we all have emotions and biases that can severely affect our decision-making. The built-in emotional wiring that all humans have in their brains can be counterproductive in our modern world, especially when it comes to investing.
Let's take a quick look at a few of the human emotions and biases that can adversely impact sound investment decision-making.
Fear and Greed — These are the two most powerful emotions that move investors and investment markets. Each emotion clouds our capability for rational and unbiased decision-making. They are the emotions that lead us to believe that prices may continue to rise or that everything has gone so wrong that prices may not recover.
Careful research and level-headed observation can help investors conquer these emotions, be brave when everyone else is fearful, and resist the temptations of a too-exuberant market.
Overconfidence — When it comes to investing, the riskiest moment may be when we feel that we are right. It is at that precise moment that we tend to disregard all information that may conflict with our beliefs, setting ourselves up for investment surprise. It is important to always keep a birds-eye perspective of your strategy, even when it appears that it everything is going according to plan.
Selective Memory — Human nature is such that we tend to paint history in a manner that emphasizes our successes and downplays our failures. As a result, we may not benefit from the valuable lessons failure can teach. The skills gained from those failures may end up being your most valuable asset. It is important to learn something from every investment outcome and apply it to your future strategies.
Prediction Fallacy — Humans have an innate desire to recognize patterns and apply these patterns to predicting the future. We believe that because "A" occurred and "B" happened that if "A" happens again, we can profit by anticipating that "B" will surely repeat. Market history is littered with examples of "rules of thumb" that have worked until they no longer worked. Approaching investment opportunities with a “case-by-case” mentality can help investors dodge easily avoidable missteps that come about due to flawed predictive strategies.
Financial markets are complex and unpredictable. Our endeavors to tap their opportunities to pursue our financial goals are best realized when we don't burden the enterprise by blindness to the inherent behavioral obstacles we all share.
Contact Us
Emotions can take advantage of our decision-making skills at the best of times. However, investment isn’t something that you have to handle all on your own. Working with a financial advisor can help you ascertain your investing strategy and keep track of the markets. Let’s work together to help ensure that you have a sound gameplan for whatever the markets may do. Contact the office today if you’re ready to get started.
-
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2025 FMG Suite.