Investing Psychology: The Effects of Behavioral Finance on Investment Choice and Bias, + Website

CHAPTER 2

Self-Image and Self-Worth

Okay, so we now know that while we can trust our senses to help us determine the future trajectory of a ball we can't trust them to help us predict the future trajectory of stocks. But we can deal with that, because we're smart, right?

In fact, we know we're smarter than the average investor, so we can be pretty sure that we will make money on the markets. After all, if we didn't think we were going to make money on the markets we wouldn't be investing, would we?

It's time to start the tour bus again, because we've just strayed into the counterintuitive world of investors' beliefs about themselves. Only we'd better be careful, because the bus driver almost certainly thinks they're a better than average driver, along with over 90 percent of other Americans. We are woefully overconfident about our investing abilities, and we don't even know it.

THE INTROSPECTION ILLUSION

I have two left feet and a cloth ear, which makes me peculiarly unsuited for engaging in any activity that involves music, a sense of rhythm, or the ability to count a beat. Imagine a baby giraffe trying to dance in roller-skates. On ice.

Despite this sad lack of musical ability I don't hold it against myself, and my own sense of self-worth isn't particularly damaged by this gaping hole in my abilities. Like most reasonably well-adjusted people, I take a sensible approach to activities I'm not very good at—I avoid them if at all possible and make a joke of them when I can't. Whenever ...