Behavioral Finance Traps
Psychology of money
This 8-part series provides comprehensive coverage of Loss Aversion. Topics include Loss Aversion, Mental Accounting, Confirmation Bias, Herd Mentality, Hyperbolic Discounting, Endowment Effect, Sunk Cost Anchoring, Diderot Effect.
Articles in this series
Loss Aversion: Why You Hold Losing Stocks
Loss Aversion: Why You Hold Losing Stocks ========================================== You bought a stock at $80. It dropped to $45. You won't sell it. The rational decision is straightforward:...
Mental Accounting: The "Bonus Money" Fallacy
Mental Accounting: The "Bonus Money" Fallacy ============================================ In the rational model of financial decision-making, money is fungible. A dollar earned as a salary bonus...
Confirmation Bias in Financial News
Confirmation Bias in Financial News ===================================== You believe the market is overvalued. You read a financial analysis arguing that valuations are stretched, earnings are...
Herd Mentality: Meme Stocks and Crypto FOMO
Herd Mentality: Meme Stocks and Crypto FOMO ============================================ In January 2021, GameStop's stock price rose from approximately $17 to $483 in less than three weeks. Tens...
Hyperbolic Discounting: Present Bias in Spending
Hyperbolic Discounting: Present Bias in Spending ================================================= Offered a choice between $100 today and $110 in one week, most people take $100 today. This...
Endowment Effect: Overvaluing What You Own
Endowment Effect: Overvaluing What You Own ========================================== In a classic experiment, Cornell University students were randomly given coffee mugs. They were then asked to...
Anchoring on Purchase Price: Sunk Cost Fallacy
Anchoring on Purchase Price: The Sunk Cost Fallacy =================================================== You've been building a deck in the backyard for three months. You've spent $6,000 in...
The Diderot Effect: New Purchases Beget More Purchases
The Diderot Effect: New Purchases Beget More Purchases ======================================================= In 1769, the French philosopher Denis Diderot received a beautiful scarlet dressing...