People give too much weight to recent experience

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People give too much weight to recent experience compared to prior  beliefs when making forecasts (sometimes dubbed a  memory bias ) and  tend to make forecasts that are too extreme given the uncertainty  inherent in their information  Overconfidence Inspite of indexing popularity, the dominance of active management in  the face of the typical underperformance of such strategies (consider the  generally disappointing performance of actively managed mutual funds  reviewed in Chapter 4 as well as in the previous chapter) is consistent  with a tendency to overestimate ability.  Conservatism
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conservatism  bias means that investors are too slow (too  conservative) in updating their beliefs in response to new evidence).  Such a bias would give rise to momentum in stock market returns.  Sample Size Neglect and Representativeness The notion of  representativeness bias  holds that people commonly do  not take into account the size of a sample, acting as if a small sample is  just as representative of a population as a large one.  Behavioral Biases Even if information processing were perfect, individuals would tend to make  less-than-fully-rational decisions using that information. These behavioral  biases largely affect how investors frame questions of risk versus return, and  therefore make risk–return trade-offs.  Framing In other words, individuals may act risk averse in terms of gains but risk seeking in terms of losses.  Mental Accounting For example, an investor may take a lot of risk with one investment  account but establish a very conservative position with another account  that is dedicated to her child’s education. People don’t like it realize  losses. In fact, investors are more likely to sell stocks with gains than  those with losses, precisely contrary to a tax- minimization strategy.  The  house money effect.  Regret Avoidance Psychologists have found that individuals who make decisions that turn  out badly have more regret (blame themselves more) when that decision  was more unconventional.  Affect & Prospect Theory Limits to Arbitrage Fundamental Risk While price eventually should converge to intrinsic value, this may not  happen until after the trader’s investment horizon.  “Markets can remain irrational longer than you can remain solvent.”  Implementation Costs Short- selling a security entails costs; short-sellers may have to return  the borrowed security on little notice, rendering the horizon of the short  sale uncertain. Sometimes you’re also just not allowed.
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