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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76388  
Subject: Re: Hi gang... wow!!! Date: 9/20/2013 3:55 PM
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There is a concept of 'sweepstakes bias' in finance psychology. It shows that humans are typically wired so that they ignore, or under-experience, the pain of small losses in aggregate less than they experience the ecstacy of large gains, in a detrimental way.

Sure. There are a lot of psycological bias/error/fallacy that people have problems with, that cause grief in the financial aspects of their lives. It's one of my favorite subjects to read about.

As you say, our brains are hard-wired that way. The ancestral people who were good at pattern-matching jumped into the trees when they saw moving waves in the grass. The ones who were bad at pattern-matcihng became leopard scat. However, not every wave in the grass is a predator. Some percentage of the ones who were only so-so at pattern-matching had turkey and boar for dinner.

In addition to your sweepstakes one is one whose name I don't recall, but it's that we hate a loss about twice as much as we love a gain, which leads us to over-weight losses and underweight gains. This leads to forgoing gains that come along with a low risk. IOW, leaving money on the table.

All these things drive our emotions, and lead us to doing comforting things that have a detrimental effect on our total well-being.

And, of course, there are predators who gladly pounce on people who are vulnerable to these weaknesses. Gambling casinos being one. The insurance industry for another. Too many policies are sold to people by appealing to their fear.

That's why there has been so much written about how all this interpays with investing. Like:
"Following the path of least emotional discomfort is a road to failure."

"Many aspiring traders [fail] because of their emotional inability to deal with market losses."

"We also try to make sure that emotionally, we are prepared for these inevitable hiccups."

"Sadly, the current infatuation with short-term volatility mitigation has us forgetting about returns, the most important driver of long-term wealth."

"As always, the bottom line is not to get carried away with your emotions. Although this is certainly easier said than done"

"Successful investing is emotionally difficult. To be a successful investor, you must make a conscious decision to redirect your natural impulses and focus on careful and thoughtful analysis. "

"...A simple inability of the Humans to stay whenever there are rising fear levels (typically manifested as higher volatility and occasional drawdowns)."

"The best gift an investor has is self-discipline. As one of our senior portfolio managers likes to point out, “To the disciplined go the spoils.”"
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