How to Take Your Emotions Out of the Sell Decision
by Jim Norris
Facing criticism from a colleague over modifications he made in his economic analysis, the famous British economist John Maynard Keynes once said: “When the facts change, I change my mind. What do you do, sir?”
Keynes’ question is a relevant one for investors. Unless you are a buy-and-hold-forever investor, you will frequently be faced with the challenge of changing your mind. A decision to buy a stock will eventually and inevitably be followed by a decision to sell the stock.
And when you decide to sell, you are effectively changing your mind about the prospects of the investment. Unfortunately, however, changing one’s mind is easier said than done. This is particularly true in the world of investments where uncertainty reigns and emotions run high. That combination—uncertainty and emotions—often leads to poor judgment.
In his book “Against the Gods: The Remarkable Story of Risk,” Peter L. Bernstein says that the evidence “reveals repeated patterns of irrationality, inconsistency, and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty.”
In the academic world, the disciplines of psychology, economics and finance have converged to study this issue, thus creating the field of behavioral finance. Numerous behavioral biases have been identified that inhibit human beings from making wise financial decisions.
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