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Your Brain On Risk: 8 Questions to Check Your Investing Biases

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  • (1:00) - Are You a Trader or Long Term Investor?
  • (5:00) - A Quiz on Your Psychology of Investing
  • (10:45) - Should You Be Listening To Everything Your Advisor Says?
  • (13:50) - What Should You Do With An Inheritance? 
  • (21:15) - How To Navigate A Market Correction
  • (25:10).- Loss Aversion, Confirmation and Availability Bias
  • (35:40) - Long Term Investing vs. Short Term Trading
  • (41:40) - Episode Roundup:

Welcome back to Mind Over Money. I'm Kevin Cook, your field guide and story teller for the fascinating arena of behavioral economics.

On the inaugural episode of the Mind Over Money podcast, I outlined what two different sciences were teaching us about how our brains make decisions, especially those involving uncertainty and risk like stock market investing.

I liked to describe these scientific twins and their goals and methods this way: neuroscience examines our behavior from the "inside-out" and behavioral economics studies our decisions from the "outside-in" to gain clues about where it all goes wrong.

In a Medium blog post that accompanied the episode, I listed eight of the most common (or intriguing) cognitive biases that get in the way of better decisions. You can find that piece here...

Mental Models of Financial Sabotage

That article also has a classic money-behavior research question from the founders of the "outside-in" psychology of economics, Daniel Kahneman and Amos Tversky. I have talked about that dynamic duo in several podcasts and perhaps most poignantly in this episode: What's the Undoing Project All About?

Charles and Tracey: The Wealth of Investing Wisdom... From Experience

Today, I was excited to discover that the summer edition of the Charles Schwab magazine OnInvesting was devoted to one of my favorite topics. The cover title reads "Mind Over Matter" and the description says "Overcoming the mental mix-ups that may be costing you money."

To take their 8-question investor decision-making quiz, I invited my colleague Tracey Ryniec on the show to find out how rational we are as professional investors.

Tracey runs two model portfolios at Zacks, the Value Investor and the Insider Trader, and she has lots of experience with her own decision-making traps as well as those of her followers.

We go through the eight questions and their corresponding cognitive biases for over 20 minutes, while also weaving in stories from our experiences as long-term investors and short-term traders giving stock recommendations to thousands of loyal followers.

Getting “Straight” on Your Goals, Time Frames, & Processes

One stock I was honored to mention was one that I just sold today for a sizable gain in my Healthcare Innovators long-term portfolio: Align Technology (ALGN - Free Report) , maker of the Invisalign clear dental "straighteners."

I explained how I also owned it for a smaller gain in my short-term TAZR Trader portfolio. Wearing two hats like this simultaneously can be done if your goals, time horizons, and research/decision processes are clear and deliberate.

It's not about having perfect discipline as much as having the systematic consistency to write out a solid plan and then check your behavior against it as frequently as possible.

Tracey and I also talk about being open to new information but then still vetting that info against your plans and processes.

And I share some ideas about investing mistakes I've made, based on an article I wrote in March. At the time, I wanted to use at least 3 blunders -- selling Salesforce (CRM - Free Report) and Adobe (ADBE - Free Report) and not buying Amazon (AMZN - Free Report) -- as windows to my own biased decision-making.

These were mistakes in the context of how bull markets actually work based on the goals, methods, and behavior of large fund managers. I explain the concepts in more detail in the article here...

A Wonder to Behold: Last Innings of the Bull Market

That article also includes a link to a special 1-minute video I made in October that sums up how and why you "follow the big money" right to the end of the bull market.

Because unless you know more than they do, you've probably called the end of the economic cycle and the top of the market about 5 times before in this decade.

Finally to learn more about the fascinating connections between Salesforce, IBM, and NVIDIA (NVDA - Free Report) in making artificial intelligence a requisite technology of the Fortune 500, see my March 2017 video which I'm certain Einstein and Watson would say still stands the test of time...

Get Your "MPA" In Deep Learning

Disclosure: I own shares of NVDA in the Zacks TAZR Trader portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader and Healthcare Innovators services. Click Follow Author above to receive his latest stock research and macro analysis.

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