Snap Judgment: When to Trust Your Instincts, When to Ignore Them, and How to Avoid Making Big Mistakes with Your Money

2. Buy High, Sell Low: The Basic Instinct Driven Error of Investing

Benjamin Graham once said, “An investor’s chief problem, even his worst enemy, is likely to be himself.” This is nowhere more true than when it comes to deciding to buy or sell a stock. We have an uncanny ability to buy stocks that are poor investments and sell stocks that are good investments. In essence, we buy high and sell low. In general, investors tend to shoot themselves in the foot—because they follow their instincts.

Once upon a time most economists and some investors thought people behaved rationally when it came to their money. Economic theory assumed investors, on average, would make good, even optimal decisions in terms of maximizing their wealth: Real money was ...