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May 12, 2012

Do you think you can avoid the recent mistakes of J.P. Morgan?

There has been a lot written about their recent losses. From my perspective, Jason Zweig’s May 11th
article in The Wall Street Journal identified the issues for individual
investors. Being aware of the findings
of behavioral finance can help the individual to maintain a health perspective.
“The literal meaning of the word ‘invest’ –from the Latin vestire, to clothe or dress-is to wrap oneself up in
something. Experiments…have shown that
people who bet on an outcome become up to three times more confident that it
will occur than people who didn’t put up any money.”
Zweig discusses the philosophies of Richard Feynman, a Nobel Prize-winning
physicist. “The Feynman principal…is…you
must not fool yourself-and you are the easiest person to fool,”
“for investors, the bigger the commitment , the more certain they become that
they must have been right to make it-and the harder it becomes to let go.” “Not trying to disprove your own beliefs is
an especially dangerous deception. …You…can fool yourself by placing too much
faith in the findings of…experts.”
The article suggests some things you can do to avoid deceiving yourself. You can set target values and dates to review
the holding. Revaluate the holding at
those dates and values to see if it has met your expectations. Seek out the opinion of others. Do not rely on only one source. Find different sources to test your
thinking. You are probably wrong if you
ridicule someone else with a different opinion.
“Above all, remember that the smarter you are, the more easily you can fool
yourself.”
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