The evolutionary trap: why humans are hardwired to be bad investors
Paul Kearney
Executive Chairman | UK
Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.
Peter Lynch
Supporting studies
Motion prediction in perception
Experiments show that the visual system automatically extrapolates the future position of moving objects, a phenomenon known as motion extrapolation.
Key study: Nijhawan, R. (1994). Motion extrapolation in catching. Nature.
Heuristics and pattern recognition
Behavioural psychology shows humans rely on shortcuts such as the representativeness heuristic, which leads people to assume patterns will continue when judging uncertain outcomes.
Key study: Kahneman, D. & Tversky, A. (1974). Judgment under Uncertainty: Heuristics and Biases. Science.
Recency bias in financial expectations
Economic research finds that recent market experience strongly influences expectations of future returns and risk taking.
Key study: Malmendier, U. & Nagel, S. (2011). Depression Babies: Do Macroeconomic Experiences Affect Risk Taking? NBER.
Investor behaviour gap
Studies comparing mutual fund performance with investor returns consistently find investors earn lower returns than the investments they hold, largely because of performance chasing and poorly timed buying and selling.
Key study: DALBAR. Quantitative Analysis of Investor Behavior (annual series since 1994).
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