ISA season and the new tax year are as good a time as any for a spot of portfolio spring cleaning. But in making the decisions to add new positions and cut back others, there are potential pitfalls to be aware of. Billions of years of evolution have wired humans to think and act in certain ways – but they’re not always well suited to the stock market.
Psychologists have identified hundreds of cognitive errors and emotional biases at work in the human mind. For the most part, they fall into two categories:
Cognitive pitfalls that lead us into defective reasoning.
Emotions (like loss aversion and overconfidence) that lead to bad decision making.
The good news about the first group is having them pointed out is apparently often enough to overcome them. With that in mind, there’s a subset of those pitfalls that are of particular interest to investors. They fall under the banner of Belief Perseverance, or cognitive dissonance.
One look at the phrase Belief Perseverance will probably have some investors nodding knowingly. These are the subtle cognitive errors that lead us to cling on to beliefs, opinions and convictions even in the face of overwhelming evidence to the contrary – and they can…
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