Judgment in Managerial Decision Making 8e Chapter 9 Common Investment Mistakes Copyright 2013 John Wiley & Sons

Active Fund Management 25% of funds outperform market Past performance poorly predicts future Returns limited by high fees Hedge funds

The Psychology of Poor Investment Decisions Overconfidence Optimism Denying random events Anchoring, status quo, and procrastination Selling winners and keeping losers

Overconfidence Produces Excessive Trading Frequent transactions increase costs Transactions are becoming more frequent Active investors underperform the market Men trade more than women

Optimism about Investment Decisions Optimistic predictions of fund performance Optimistic recollections of past performance

Denying that Random Events are Random Underweighting randomness Neglecting regression to the mean Limited evidence of consistent performance – Momentum effect – Performance reversals in outliers

Anchoring, the Status Quo, and Procrastination Retirement plans – Failing to change risk allocations – Arbitrary options influence risk allocations Sticking to the status quo Failure to “opt-in”

Prospect Theory, Selling Winners, and Keeping Losers Selling winners Keeping losers Impact on returns

Active Trading The rise of online trading Initial success stories Underperforming the market Considering other traders

Action Steps Determine your investment goals – Save enough for retirement – Embrace risk now – Reduce risk later – Invest in annuities Difficulty predicting the stock market Putting this information to use – Avoid unnecessary fees – Consider tax issues