Even seasoned investors fall prey to cognitive biases. Loss aversion leads to panic selling, while confirmation bias makes us ignore red flags. DALBAR studies show the average investor underperforms the S&P 500 by 4% annually due to emotional trading.
Combat biases with:
- Automation: Robo-advisors enforce disciplined investing.
- Checklists: Warren Buffett’s “20-point investment criteria” prevents impulsive bets.
- Third-party reviews: Hire a fiduciary to challenge your assumptions.
Corporations aren’t immune. Kodak’s reluctance to pivot from film (due to sunk cost fallacy) is a cautionary tale. Build decision-making protocols that mandate data over gut feelings.