How to Invest Without Emotions Clouding Your Judgement
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Here's your Money Briefing for Friday, September 17th. I'm J.R. Whalen for The Wall Street Journal. Building a stock portfolio or picking the right investment mix for your 401k takes some knowledge, patience, and yeah, a little bit of luck. But not every investment is a winner. And knowing when to let go of an asset before it's too late is also key to financial success. Yet many people have a hard time knowing when to walk away.
The real thing people hate about losing money is that they have to kick themselves and say, you know, how could I have been so stupid? What kind of idiot am I? That's what people hate.
Coming up, WSJ Intelligent Investor columnist Jason Zweig will be here to talk about the mental mistakes people make when investing and steps you can take to avoid falling into those traps. That's after the break.
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Picking the right investments is often a numbers game, but for many people, it winds up being a head game where their emotions take over their decision making and poorly thought out choices can cost them big time. Jason Zweig writes the Wall Street Journal's Intelligent Investor column. He's been looking into the psychology of investing and how investors can keep their emotions in check and protect their portfolio. And he's with me now. Hi, Jason. Thanks for coming on the show.
My pleasure. Thanks for having me.
So Jason, psychologists have studied people's tendency to overvalue certain things. It's called the endowment effect. So what does that tell you about human behavior and how does that show up in investments?
Decades ago, psychologists and economists found that if you gave people something, and it can be just about anything, a coffee mug, a pen, probably paperclips, they immediately place a greater value on it than they would if they didn't possess it and were asked to buy it. So, for example, if I give you a coffee mug, you might say it's worth $7. But if I ask you to buy the same mug, you might not be willing to pay more than $3 for it. And we see the exact same thing play out in financial markets where once people invest in an asset, they don't just own the asset, but they've invested some of themselves in it. And it becomes much harder to let go of it once they own it. And they place a considerably higher value on it after buying it than they would if they didn't own it in the first place.
Okay, but isn't the goal of any investor, whether you're buying huge blocks of shares or shoring up your 401k or trying to pay your kids' college costs to avoid losing money? So what's getting in the way of what would seem to be a pretty logical thought process?
Well, of course people hate to lose money. Nobody likes a loss. But what you really lose when you lose money is not just dollars or whatever currency you're measuring your investments in. What you also lose is your pride and your sense of status and self-esteem and also your conviction that you're a really smart, knowledgeable investor.
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