Investing's Emotional Traps and How to Escape Them

Here are some thoughts from the wonderful book The Bogleheads' Guide to Investing (I LOVED the book -- see my rating for details) on investing's emotional traps and how to escape them. Here's the list of traps:

• Recency bias
• Overconfidence
• Loss aversion
• Paralysis by analysis
• The endowment effect
• Mental accounting
• Anchoring
• Financial negligence

I've probably fallen into each of these several different times in my investing career. Then I got smart, started investing primarily in index funds, and started to ignore most of the financial media (the source of my problems) when deciding on investment options. Since then, I've done fairly well (though the traps continue to entice me -- they're hard to let go of!)

The authors then add this commentary on this issue to wrap it up:

Investing is the one area where acting on emotions is likely to lead you down the path to financial ruin. Playing your hunches, blindly following the crowd, acting on a hot tip, trying to make a big killing, or falling prey to any of the other emotionally based investment decisions described in this chapter will almost always leave you poorer. Understanding behavioral finance will better enable you to deal with your emotions and make better investment decisions.

All I can say to this is "AMEN!!!!"