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Friday, August 27, 2010

Investing Psychology

"I can calculate the motions of heavenly bodies... But not the madness of people!" - Isaac Newton (1642 - 1727)

Much of economic and financial theory is based on the notion that individuals act rationally and consider all available information in the decision-making process.

However, researchers have uncovered a surprisingly large amount of evidence that this is frequently not the case. Dozens of examples of irrational behavior and repeated errors in judgement have been documented in academic studies.

Peter Leonard Bernstein in his 1996 book "Against The Gods" states that the evidence "reveals repeated patterns of irrationality, inconsistency, and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty."
A field known as "behavioral finance" has evolved that attempts to better understand and explain how emotions and cognitive errors influence investors and the decision-making process.

Many researchers believe that the study of psychology and other social sciences can shed considerable light on the efficiency of financial markets as well as explain many stock market anomalies, market bubbles, and crashes.

Investing can be an emotional process unless you understand what you are investing in, what you're trying to accomplish and understand a few basic facts and statistics.

To make educated decisions and to avoid the emotional ones always try to pursue the rational and logical side of investing.

Remember, facts and statistics are the basis for good and profitable investing.

The stock market is not gambling and the reason is simple, gambling is never included in companies' annual reports.