Chapter 9 Common Investment Mistakes
Active Fund Management
● 25% of funds outperform market
● Past performance poorly predicts future
● Returns limited by high fees
● Hedge funds
Mutual funds tend to do poorly is because of the fees compared to index funds. Market funds are better
The Psychology of Poor Investment Decisions
● Overconfidence
● Optimism
● Denying random events
● Anchoring,status quo, and procrastination
● Selling winners and keeping losers
Framing and risk aversion
Overconfidence Produces Excessive Trading
● Frequent transactions increase costs
● Transactions are becoming more frequent
● Active investors underperform the market
● Men trade more than women
Active traders face mounting cost each time they pay a fee to trade. Unfortunately it appears that
traders are increasingly engaging transactions and turning over their portfolios given the increasing
tendency to engage in high cost transaction and the inconsistency in trader performance it's really no
surprise that most active traders tend to underperform the market by sizable margin. Why? The fact
they are willing to pay a fee to trade indicates they have confidence or ability to identify good stocks. If
people outperform the market even when taking their fees into account than their confidence would be
well founded. However, because they underperform the market as result of paying higher transactions
fee it seems that active traders overconfident in their ability to outperform the market. Interestly men
actively trade more than women which suggest that men are more overconfident in their ability to beat
the market than
women
Optimism about Investment Decisions
● Optimistic predictions of fund performance
● Optimistic recollections of past performance
One reason people continue to invest in mutual funds despite their inferior returns compare to the
market they are over optimistic. First people tend to form overly optimistic predictions of the future
performance of the stocks in which they invest even when presented with the objective performance
status stating that the funds underperformed in the market in the past. Second people tend to form
optimistic recollections of past performance of their funds. Optimism causes people to continue to
Active Fund Management
● 25% of funds outperform market
● Past performance poorly predicts future
● Returns limited by high fees
● Hedge funds
Mutual funds tend to do poorly is because of the fees compared to index funds. Market funds are better
The Psychology of Poor Investment Decisions
● Overconfidence
● Optimism
● Denying random events
● Anchoring,status quo, and procrastination
● Selling winners and keeping losers
Framing and risk aversion
Overconfidence Produces Excessive Trading
● Frequent transactions increase costs
● Transactions are becoming more frequent
● Active investors underperform the market
● Men trade more than women
Active traders face mounting cost each time they pay a fee to trade. Unfortunately it appears that
traders are increasingly engaging transactions and turning over their portfolios given the increasing
tendency to engage in high cost transaction and the inconsistency in trader performance it's really no
surprise that most active traders tend to underperform the market by sizable margin. Why? The fact
they are willing to pay a fee to trade indicates they have confidence or ability to identify good stocks. If
people outperform the market even when taking their fees into account than their confidence would be
well founded. However, because they underperform the market as result of paying higher transactions
fee it seems that active traders overconfident in their ability to outperform the market. Interestly men
actively trade more than women which suggest that men are more overconfident in their ability to beat
the market than
women
Optimism about Investment Decisions
● Optimistic predictions of fund performance
● Optimistic recollections of past performance
One reason people continue to invest in mutual funds despite their inferior returns compare to the
market they are over optimistic. First people tend to form overly optimistic predictions of the future
performance of the stocks in which they invest even when presented with the objective performance
status stating that the funds underperformed in the market in the past. Second people tend to form
optimistic recollections of past performance of their funds. Optimism causes people to continue to
