Dealing with investor irrationality

We recently asked financial experts from across the nation to list the most common investing mistakes made by individual trustees, 401k plan sponsors and regular investors. What we found could be lumped into three distinct and recognizable categories (see “Experts: 3 Common Investor Mistakes All Retail and 401k Investors Should Avoid“). As we dug into the responses, however, we couldn’t help but notice one dastardly word lurking in the shadows of each of these mistakes. That word is “emotion.”

It’s easy to view the world of investing as the antiseptic tango between forthright data and agnostic formulae played out in the sterile cells of a dispassionate spreadsheet. But the reality differs from this fantasy. Even professionals, more often unduly influenced by the very clients they supposedly advise, can succumb to the evil temptress of the irrational. And if trained specialists need to constantly guard against this seduction, imagine the vulnerability of those bereft of such training.