We're hardwired to make blunders and avoiding them requires nearly superhuman discipline. Four tendencies conspire to sabotage our decisions at critical moments:
We think we're smarter than we are, so we think the stocks we've chosen will deliver even when the market doesn't. When evidence contradicts us, we're blinded by...
We seek information that supports our actions and avoid information that doesn't. We interpret ambiguous evidence in our favor. We can cite an article that confirms our view but can't recall one that challenges it. Even when troubling evidence becomes unavoidable, we come up against...
STATUS QUO BIAS.
We like leaving things the way they are, even when doing so is objectively not the best course. Plenty of theories attempt to explain why, but the phenomenon is beyond dispute. And supposing we could somehow fight past these crippling biases, we'd still face the mother of all irrationalities in behavioral finance...
LOSS AVERSION (and its cousin, regret avoidance)
We hate losing more than we like winning, and we're terrified of doing something we'll regret. So we don't buy and sell when we should because maybe we'll realize a loss or miss out on a gain.
These tendencies are so deep-rooted that knowing all about them isn't nearly enough to extinguish them. The best we can do is wage lifelong war against them and hope to gain some ground.
Geoff Colvin (from his Fortune Magazine article "Investor March Madness: We're Wired for Blunders, but can Improve Odds")