Cass Sunstein, in a recent Bloomberg article in which he examined the causes of his own personal investing mistakes, reminisced about a dumb selling decision that he made in 2011. Putting himself on the couch to figure out what he did wrong, Sunstein came up with three reasons to explain why he brashly chose to sell something on a whim:
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“Of the behavioral mistakes to which I fell victim, the first is called “availability bias.” Behavioral scientists have shown that if something has happened in the recent past, it is cognitively “available,” and people tend to exaggerate the probability that it will happen in the future.
Availability bias isn’t exactly irrational, but it can produce big mistakes. The stock market did collapse in 2008, but it doesn’t collapse very often, and in 2011 I shouldn’t have focused on the risk of another meltdown.
The second mistake involves “loss aversion.” People