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What Investors Should Understand About Psychology

Cognitive biases can lead investors astray, but here's what you can do to overcome them.

By Josh Goulding

Humans like to think of themselves as rational, and economists have historically modeled the markets with the assumption that people will act rationally. Instead, investors tend to react to market movements with a range of biases, from overconfidence to costly loss-aversion bias.

Behavioral finance, pioneered by Daniel Kahneman and Amos Tversky, challenged the steadfast belief that markets are driven by classical economic theory.

This past year was marked with pronounced emotional moments where investors went from feeling like it was 1929 in March 2020, to feeling like they were experiencing the 1999 market euphoria in January 2021.


One of the most important things you can do as an investor is to understand ingrained psychological biases. Being aware of these biases can help prevent poor decision-making during emotionally charged moments. Here are three biases to be aware of and how to combat them:

  • Overconfidence bias
  • Loss aversion
  • Confirmation bias

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Entitlements Will Eat America’s Economy

As we did in the 1990s, lawmakers should put aside partisanship and get to work on reform.

By John R. Kasich

When I was chairman of the House Budget Committee in 1997, Republicans and Democrats in Washington saw past our differences to balance the federal budget for the first time in decades. Working together, we managed to follow up that success with three more balanced budgets. Yet it’s been 17 years since lawmakers and the White House approved a spending plan that didn’t add to the national debt.

Rather than tackling their budget responsibilities head-on, each successive Congress and administration has passed temporary, stopgap spending bills. In fact, Washington set a record for that policy of avoidance in 2017 by passing six short-term extensions in less than a year.

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Global Market Breakdown | Q4 2017

Global equity markets advanced in fourth quarter with a 5.93% aggregate return. Emerging markets (+7.66%) outperformed US markets (+6.49%) and Developed (ex US) markets (+4.57%).

In the US, mid cap (+6.94%) outperformed large cap (+6.77%) and small cap (+3.59%). Among price-to-book asset classes, growth (+8.28%) beat neutral (+5.94%) and value (+5.75%).

In Developed markets, mid cap (+5.74%) outperformed small cap (+5.28%) and large cap (+4.15%) while value (+5.39%) beat growth (+4.70%) and neutral (+3.83%). Among the twenty-two Developed countries, Singapore (+8.78%) experienced the largest gain while Japan (+8.63%) made the largest contribution. Sweden (-2.70%) had the lowest return and was the largest detractor.

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Recent Market Volatility

After a period of relative calm in the markets, in recent days the increase in volatility in the stock market has resulted in renewed anxiety for many investors.

From February 1–5, the US market (as measured by the Russell 3000 Index) fell almost 6%, resulting in many investors wondering what the future holds and if they should make changes to their portfolios.1 While it may be difficult to remain calm during a substantial market decline, it is important to remember that volatility is a normal part of investing. Additionally, for long-term investors, reacting emotionally to volatile markets may be more detrimental to portfolio performance than the drawdown itself.

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Who’s Afraid of Index Funds?


If passive investing creates market distortions, active managers can win big.

Challenges to the status quo—political, economic or social—always evoke strong emotions, from enthusiastic support to fierce criticism. The loudest critics often have the most to lose, even if they acknowledge some benefits of the new regime.

This clash is now unfolding over ascendant investment vehicles: index and exchange-traded funds, or ETFs. The dramatic growth of such products has been revolutionary. More investors are choosing indexing over funds managed by traditional stock pickers, known in the industry as active managers. Since 2009, U.S. index funds have seen inflows of some $1.7 trillion, compared with outflows of nearly $1 trillion for actively managed mutual funds.

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