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Matt's Market Insights

Separating hope from reality can be a difficult task, but it's a necessary one. Whenever we enter into a position, our ability to remain objective becomes compromised. We immediately begin hoping that our decision was prudent and that whatever asset we purchased will go up in value. It's human nature. We're never going to be able to prevent this, but there are measures we can take to outsmart our own weaknesses.


Studies in behavioral finance have discovered an anomaly called the disposition effect. This refers to the tendency by investors to sell positions which have gained in value and keep positions which have lost value. We all exhibit this behavior, but why? There are many suggested explanations including loss aversion, prospect theory and cognitive dissonance; but ultimately, it comes down to the fact that when confronted with losses, we always seem to "hope" our decision was correct and to sit tight.


Behavioral economists ... Log in or subscribe to continue reading.

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