Including emotional bias .. common mistakes that must be avoided in order to make money

No matter how smart you are, how educated you are, or how successful you are on a professional level, when it comes to investing, you may not be making the best decisions.

That's because you're human, which means you're forced to respond in certain ways that serve you well in many parts of your life, but tend to work against you when it comes to making smart investment decisions, according to psychologist Daniel Crosby, author of "The Behavioral Investor." NN».

But here's the thing: if you know how to perform when it comes to the markets, it can actually help you be a better investor.

Drawing on decades of groundbreaking behavioral research, Crosby said

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But when you do keep them in mind, you can take steps to either mute their impact or harness them to your financial advantage:

- Alignment of the ego

Everyone has an ego - this protects us in many ways, in part by creating a sense of confidence - and we often become overconfident in our own abilities and judgments.

“Ego gets us out of bed in the morning,” Crosby said.

Those who become highly confident are more flexible and achieve professional success.

People who are overconfident are often happier and more likely to be successful businessmen and politicians.

A (strong) ego can protect us from setbacks, disappointment and loss.

But when it comes to investing, too much self-confidence can cost you real money.

For example, Crosby said, most of us would rather find information that confirms what we already believe than search for information that challenges our beliefs.

He cited research showing that even when presented with facts that directly contradict what we believe, thanks to our ego, we may become more deeply rooted in those false beliefs.

One way this can happen when you're investing is that you can feel certain that a particular company or new asset class - like crypto - will win in the future.

So you throw a disproportionately large amount of money at your idea that you can't afford to lose.

Conservative bias

Investing always involves risks.

But people's willingness to stick to the norm or take the adage "invest in what you know" may actually increase this risk.

Crosby used the example of someone in the technology industry, who buys a house in a tech hub like San Francisco and invests primarily in technology stocks.

The result: His financial prospects will depend disproportionately on the health of the tech sector because he has devoted most of his time and money to it through his job, assets, and investment portfolio.

When the technology sector takes a hit, it can take a financial hit.

Another method that investors often use is to invest primarily in US stocks based on the belief that non-US stocks are too risky.

Attention bias

Humans tend to pay disproportionate attention to bad news, high dramatic events, or low probability events (such as shark attacks or planes crashing into buildings)—both of which can distort our perception of risk.

Moreover, information overload — whether from data, research, or news — can lead to misleading decisions because too much information makes it hard to see the facts, Crosby noted.

Emotional bias

Our emotions and intuition can protect us in some difficult situations, or they can help guide us.

For example, you may finally choose a good partner after years of dating others who weren't a good match for you.

But our emotions can also cause us to act impulsively, going beyond what we usually know we should do.

Emotion in the markets can be costly.

If your fear is activated, you can panic and sell at the wrong time.

Or if you're cheerful, your optimism may distort your sense of how much risk you're really taking on an investment.