Psychology of Investing Chapter 2

Psychology of Investing Chapter 2 - sell stocks and buy...

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This chapter talks about overconfidence and how it can affect peoples' decision in investing. People have a tendency to invest or risk more when they feel like they are in control; of outcome, task familiarity, information, and active involvement, or when they don't know about previous results. The self-attribution bias causes people to believe that when something good happens it is a result of skill while a lose is due to bad luck. Studies have also shown that men are more overconfident than women, leading them to turnover their portfolio more often. A 50 percent turnover during a year means selling half the stocks owned and re-buying new ones and the higher the turnover rate results in lower returns as a result of commissions, taxes, and losses. Studies have shown that single women have the lowest turnover ratio followed by married women, married men, and then single men. Also, overconfidence causes people to
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Unformatted text preview: sell stocks and buy lower quality ones which will make them lose more from missing out on the rise of their sold stock. Sometimes trading volume shows how well the market is doing, better performance can lead to higher volume and vice versa. People who are overconfident will buy too many high risk stocks and under diversify. Beta measures volatility compared to the market, greater than one exceeds market, one equals market, and less than one is less than market. The illusion of knowledge is where a person thinks more knowledge results in better decisions, it can also lead to increase confidence while the accuracy may not match. A study shows that people had higher returns when using a broker than going online. This is a result of higher turnover ratings, overconfidence, and active involvement....
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