Being Rational

September 11, 2013

There are many ways to be irrational with your money. Being and acting rational with your money is extremely important. There are 4 common things that can be major mistakes. Have you ever noticed one of these 4 things happening to you or those you know?

Anchoring - When you become fixated on one piece of data, even though it's out of date. "If I paid $80 for stock that is now under $70, I won't sell it until it gets back to $80 because that's my anchor," says Frank Murtha, co-founder of consulting firm MarketPsych.

What you can do: Present the change as an opportunity to move into a potentially lucrative new investment

Endowment Effect - Placing more value on things you own simply because you own them and you've become emotionally attached to them.

What you can do: Learn what you stand to lose by sticking with this choice and what you could gain by agreeing to sell.

Overconfidence - The belief that you can outperform the market consistently.

What you can do: Use the "Ulysses Strategy." This term refers to the plan Ulysses used to be able to hear the Sirens' song without flinging himself into the sea - having his crew tie him to the mast. With overconfident investors, it means committing to a balanced strategy, with contingencies for specific conditions.

Disposition Effect - Selling profitable holdings too early and unprofitable ones too late.

What you can do: Try the Ulysses strategy too!

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