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5 Things Investors Need To Know about Investor Behavior | Victor Ricciardi | LinkedIn

See on Scoop.itBounded Rationality and Beyond

Overconfidence versus Status Quo Bias

One major category of investor exhibits overconfident behavior and this results in over-trading, increased expenses, and lower performance in their portfolios. On the other hand, retirees or retirement savers tend to suffer from inertia or (status quo bias) and under manage their investment accounts. A compromise approach is develop a strategy that addresses the shortcomings of both of these two biases by indentifying the individual’s risk tolerance profile, constructing a diversified asset allocation strategy of mutual funds and other asset classes, and implementing portfolio rebalancing on an annual basis.

Mental Accounting

Mental accounting is a cognitive bias in which, investors separate their financial holdings into different mental accounts. If an individual has a negative investment return for the year on a stock, this person will apply a judgment process that only focuses on the favorable attributes of the security such as a high dividend yield by inserting it into a positive mental account. People should view individual securities in the content of a long-term diversified investment portfolio.

Lack of self-control

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