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Why are we wired to make bad investments?

“The market is full of people who think they can beat the market, and full of people who believe them. This is one if the greatest mysteries of finance. Why do people believe they can do the impossible? Why do other people believe them?” – Daniel Kahneman

As humans, we are wired to make the wrong investment decisions. Everyone knows to buy low and sell high, this much is common sense. So, why do we see such a large portion of people selling when markets fall?

Simply put, it is a flight response. Our minds tell us that we need to get out of here and jump ship before it sinks. Even though this is counter intuitive to what it is we want to do, we can’t help but run from the big bear which you think is coming to get you.

The bottom line is that: Investment’s work, investors don’t

So, how do you avoid these counter-productive decisions?

First, you need to understand that markets are fuelled by greed and fear of investors – beating this is the goal and key to successful investing.

The idea is that when the market is higher, people become greedy and buy. When markets fall, people become fearful and sell to get out of the ‘loss’. You need to do the opposite and understand markets are cyclical forces. They operate in waves, simply put; what goes up must go down.

Understanding this already puts you ahead of a good portion of investors.

Next, you need to learn how to block out the media hype. The media knows how to play on these emotions, and will do so frequently. Learning to recognise this kind of hype and electing to ignore it can be one of your strongest tools to successful investing.

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Happy investing!


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