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2. Your "mental accountant" is an embezzler.
Your brain loves so-called mental accounting. A dollar looks different "depending on where it comes from, where it's kept, or how it's spent," notes "Big Money." You spend tax refunds fast, but you hang on to stock inherited from Grandma. Wall Street's marketing gurus know the way into your pocket is through that unconscious 98% that's manipulating your brain's accounting system.
3. You hate to lose more than love to win.
Psychologists call it "prospect theory." We investors hate to lose so much we often sell winners to lock in profits. But we hang on to losers, praying for a miracle.
4. You throw good money after bad.
Here's a familiar example: First blunder, pay too much for a house. Second, fail to get out at the top. Third, turn down a bid because it's less than you paid. You're stuck paying down a big, bad mortgage instead of cutting your losses.
5. Decision paralysis keeps you from acting.
How your brain labels options changes the outcome: Whether it's "one of rejection or one of selection, or whether you view it as protecting a gain or avoiding a loss," says "Big Mistakes." Labeling confusion leads to decision paralysis: Your brain locks up, doing nothing, and you lose again.
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6. You don't sweat the small stuff.
With bigness bias, you ignore small numbers such as brokerage commissions and fund fees. Big mistake. This is why more Wall Street bankers, brokers and fund managers own more yachts and make dozens of times more than the average clueless investor.
7. You focus on things that matter too little.
Like a cruise missile, your brain locks on anchors, specific events that loom big in your brain, blinding you to important stuff. If you focus too much on a major catastrophe like the dot-com crash, you might ignore the power of compounding and dollar cost averaging in building long-term wealth.
8. Your biggest saboteur is overconfidence.
The investor's No. 1 mistake: You think you know more than you do and have all the skills to beat the averages. Wrong. You're no match for the high-tech quant traders buying and selling millions all day long.
9. Follow the herd -- into the sea.
The trend is not your friend. Yet you insist on following the other sheep, even when you know they're also being manipulated. You buy at the top and sell at the bottom, losing at both ends. And Wall Street gets rich off your naiveté.
10. Yes, you can know too much!
Information overload is a killer, confusing your brain. In his bible, "Advances in Behavioral Finance II," professor Richard Thaler says Wall Street "needs investors who are irrational (and) woefully uninformed." Wall Street's goal is to keep you that way. The Street panders to your delusions of superiority because that makes you vulnerable.
11. The joke's on you. Knowing new rules makes brainwashing easier.
This is the most amazing outcome of all: Since 1954, despite all the brain profiling in great books like Belsky and Gilovich's and with Daniel Kahneman's 2002 Nobel Prize in economics for exposing Wall Street's myth of the "rational investor," today investors are even more willing to let Wall Street take advantage of them, making Wall Street richer.
Investors live in a self-induced trance world. That's why I call neuroeconomics Brainwashing 101 for Dummies.
This article was reported and written by Paul B. Farrell of MarketWatch.
Published July 17, 2008
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