With the help of BehavioralFinance.net, Slate lists several common pratfalls by even seasoned investors. A prospectus:
The Gambler’s Fallacy: We tend to believe, incorrectly, that if a flipped coin has come up heads three times in a row it is more likely come up tails next time. Similarly, just because a stock or market has gone up or down for a while doesn’t mean it is more likely to go the other way soon.
This is the reason why analysts always write in really fine print on their glossy brochures, “Past performance is not indicative of future results.”
Why are there so many books on playing the financial market? Why are there more types of mutual funds than lottery games? Because frankly no one really knows.
Why does Gordon Pape go on TV urging gullible seniors to remortgage their homes for an extra vacation week in Florida? Because people think he is an expert. Don’t get me wrong, he’s written some well-received books and made a bit of money in the markets, but past performance is not indicative of future results.