Behavioral pitfalls - Bogleheads
Understanding and avoiding behavioral pitfalls has a greater final impact on your investing success than any other factor. Because emotions and subsequent behavioral pitfalls often lead to miscalculating risk tolerance and asset allocation, you need to be aware of behavioral pitfalls before making asset allocation decisions.
"Your investing brain does not just add and multiply and estimate and evaluate," says Jason Zweig in his book, Your Money and Your Brain.[1] "When you win, lose, or risk money, you stir up some of the most profound emotions a human being can ever feel."
"Financial decision-making," says psychologist Daniel Kahneman in Zweig’s book, "is not necessarily about money. It’s also about intangible motives like avoiding regret or achieving pride."
Basing decisions on a past value or event (the "anchor"), even though the value or event has no relevance to the decision. For example, we tend to hang on to losing investments by waiting for the investment to break even at the price at which we bought it. As a result, we anchor the value of our investment to the value it once had, and instead of selling it to realize the loss, we increase risk by holding it and hoping it will go back up to its purchase price.[2][note 1]
