Optimism

People tend to be optimistic about the future and that is not a bad thing in general.  However, this optimism might easily develop into “wishful thinking”. Too much “wishful thinking” will be harmful to your money.  You might be awful at managing your money when…

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Credulity Bias

“The Moon is made of green cheese.” While we might like to believe that we are all perfectly rational, reality is far different.  Unfortunately, we tend to be susceptible to the manipulative messages that the financial industry and the popular…

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Hindsight Bias

Also known as the “I knew it all along” effect.  Hindsight bias refers to our tendency to take facts now known and  interpret them in a way that explains past events.  In retrospect everything seems clear and inevitable. This is a…

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Overconfidence

A close relative to the previously mentioned Confirmation Bias, Overconfidence is the tendency to overestimate our own abilities (i.e., we aren’t as smart as we think we are).  We tend to think that we are much better forecasters and estimators than we…

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Confirmation Bias

We let confirmation bias take control of our mind by only seeking out information from sources that agree with our pre-existing beliefs.  Conversely, we tend to ignore and dismiss information (= disconfirming evidence) which tend to disprove our initial impressions. It’s the tendency to interpret the glass…

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Endowment Effect

Endowment Effect is the tendency to fall in love with what we own and makes us resist change.  Or in other words, this is the tendency to consider something you own to be worth more than it would be, if you didn’t…

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Self-Serving Bias

Most of us have a good reputation with ourselves. You associate all of your financial successes with skill, but all your financial failures with bad luck or the “unfair” market.  Rather than admitting and learning from your mistakes, you ignore them, bury…

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Regret Aversion

This is the tendency to avoid taking an action due to the fear that—in hindsight—it will turn out to have been less than optimal.  Like leaving money in a bank account, rather than putting the cash in an investment with…

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Bigness Bias

Have you also observed that many people behave as if not all dollars are created equal?  By assigning relative values to different moneys that in reality have the same buying power, they run the risk of being too quick to spend,…

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