This investment insight delves into behavioral economics and the emotional side of investing.

  • The emotions that may lead human beings to believe they can outperform the market are the same emotions that may also unconsciously lead them to make poor investment decisions.
  • There are a number of steps that you can take to protect yourself from the inherent biases and natural human emotions that lead to investment mistakes.
  • Partnering with those who are used to the ebbs and flows of financial markets should help keep your investments on a rational, unemotional keel.

According to the theory of efficient markets, where independent news flows freely and markets are fairly valued, it is impossible to “beat the market” through expert stock selection. Left to their own devices, markets would probably be nothing but rational, with trading wholly justified by universally available information.

However, there is a gap between what should be and what is, between decisions made in a theoretical marketplace that seeks to optimize a rational outcome and decisions made by human beings—with all their fear, greed, vulnerabilities, egos, and weaknesses.

Please see important disclosures at the end of the article.

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