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Are You Hardwired To Make Bad Investment Decisions?

I was looking around for some investment tips the other day and I came across this infographic.  Being a visual learner, I love them and they really help me get a grasp on something that I want to learn more about.  Since I am relatively new to investing, I have been trying to learn more about different types of investment vehicles along with good strategy.  I think it is always a good bet to educate yourself when you are about to jump into anything, especially if you have the chance to lose money.

That being said, I found this infographic very interesting.  It covers how some people are wired to make bad investment decisions because they are not risk takers.  I can really see this as true.  You can see the ones that are making poor investment decisions when they pull out of the market because their stocks are down or because the news tells them about impending doom.  The problem is that, for the most part, investing should be for the long term.  People don’t usually make a ton of money in the stock market in a few days or months.  They make their money over a series of years.  Now, I know that money can be made with quick buying and selling, but you really have to be on the ball with this type of investment strategy.

So, I want to see if you think you are hardwired to make bad investment decisions.  Do you get scared when the market tumbles and pull your money out?  Are you a risk taker and that is why you invest in the stock market in the first place?

hardwired investment decisions

 

What do you think of this infographic?  Have you ever thought about your investment decisions as being wise or poor?

5 Ways your brain tricks you into bad investment decisions. infographic by infoglyphs.


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About the Author Grayson Bell

I'm a business owner, blogger, father, and husband. I used credit cards too much and found myself in over $75,000 in debt ($50,000 in just credit cards). I paid it off, started this blog, and my financial life has changed. I now talk about fighting debt and growing wealth here. I run a WordPress maintenance and support company, along with another blog, Eyes on the Dollar, which is another great personal finance blog.

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42 comments
Your Daily Finance says July 8

I really like infographic as well I guess we both like visuals. Think people let one bad decision dictate others. Some people shouldn’t invest simply because they are willing to do any research. I don’t care what the invest is you need to know what you are investing in and the odds of returning profits. With stocks its all about the pain and setting a strategy. Too often I see people put money in and then they lose a little and they take it out. Then they buy another stock and the same thing happens. DCA it if you have 1000$ to inveset buy $250 worth now and a little later until you get used to the ups and downs of the stock market.

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    Grayson says July 9

    I agree with you. Bad decisions can snowball very quickly. With investments, it is usually better to wait it out if you have the long term in mind.

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DC @ Young Adult Money says July 8

It’s pretty depressing to think that people are hardwired to make bad investment decisions. This is a pretty good infographic compared to other ones I’ve seen, thanks for sharing!

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    Grayson says July 9

    I agree with you DC and I am glad you enjoyed the graphic.

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Glen @ Monster Piggy Bank says July 8

I’m loving this infographic, definitely one of the best I have seen recently and probably quite accurate. I didn’t mind taking a lot more risks with my money when I was younger, but now that I have a family I am a lot more conservative than I used to be.

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    Grayson says July 9

    I agree with you Glen. I took a lot more risks when I was younger and without a child. Now, I have to be a little more conservative.

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Holly@ClubThrifty says July 8

Love the infographic. The stock market is full of risk takers, certainly. However, if you look at all of the winners mentioned, they invest in “good companies” over the long-term and don’t panic when the market is down. Instead they look for deals.

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    Grayson says July 9

    You are correct there Holly. They are diligent enough to get the right information and they invest in quality companies run by quality people.

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Matt Becker says July 8

I think another big problem is that people love to act on the small bit of information they have, completely ignoring the fact that there’s a ton of information they don’t have. This causes them to make what they think are “informed” decisions, when they are in fact not much more than random guesses. The reality is that all very easily invest based on some of the soundest and time-tested principles with target retirement funds and likely beat 80-90% of the other investors out there.

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    Grayson says July 9

    Agreed Matt. People don’t take the time to get all of the information and only use what is fed to them, usually by the media. That tends to end poorly for those investing.

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John S @ Frugal Rules says July 8

Nice infographic Grayson! Oh boy, I saw many of these things everyday in my old job and it just made me either shake my head or saddened at how some would just seem to choose to lose money. The recent years has really made many people quite jumpy – which I get to a certain aspect and make decisions they might not normally make. Thus why investing logically and not emotionally is so important, yet often easier said than done.

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    Grayson says July 9

    I am sure you did John. I am sure you wanted to shake a few people for jumping out when the slightest dip happened.

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Laurie says July 8

This is exactly why we are doing some serious education before we attempt in investing again. We’ve done some investing before, and always panicked and sold early. Great post and infographic, Grayson.

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    Grayson says July 9

    Information about investing is prevalent, which is a good thing. It can’t hurt to get educated before you jump in with a lot of money.

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Pauline says July 8

$145K for one Berkshire Hathaway share, wow I had no idea they traded for the price of a small family home. cool infographic.

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    Grayson says July 9

    That amazed me as well, so I had to check to make sure. It is actually up to $173,000 at the time of this article. I only see about 500 shares out though.

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Girl Meets Debt says July 8

I actually really liked this infographic – thanks for sharing Grayson! I wonder if one day I will have enough to buy a Berkshire Hathaway share….? 😛

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    Grayson says July 9

    You can create the goal for yourself Wendy. I would say, go for it! Glad you enjoyed it.

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Greg@Thriftgenuity says July 8

Most of this seems true. People want a warm and fuzzy feeling and, generally, going along with the crowd does that. The part people miss is the majority are not rich, so you actually want to be in the minority.

That said, with the last part of the infographic, one would think it is recommending getting out of the market if, since January record amounts are investing. It would seem that the minority is now holding off on buying.

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    Grayson says July 9

    People do love those warm, fuzzy feelings inside, but the stock market won’t always give you that.

    I agree about the last part, it confused me a little.

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Shannon @ The Heavy Purse says July 8

Very interesting infographic, Grayson. Thanks for sharing. I love visuals too. One thing I run into all the time is people don’t make decisions for themselves – they make based on what everyone else is doing. Everyone is buying this. Everyone is selling this. Just because “everyone” is doing it, doesn’t mean that it’s right for you – because your situation is personal to you.

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    Grayson says July 9

    The good old herd mentality. It is quite prevalent in investing along with many other things that deal with money.

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Kim@Eyesonthedollar says July 8

I’m not surprised. I’ve know so many people who pull their money out after a market dip. I’ve tried to tell them the only real way to have a loss is to cash out. It’s like owning a home that goes down in value. You still own it, but it’s not worth as much right now. Would you sell at the lowest point or wait until the value goes up? Somehow most people just don’t see them as the same.

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    Grayson says July 9

    Right on Kim. You don’t lose the money until you cash out. If you can ride the down times, it will most likely come back up.

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Jake @ Common Cents Wealth says July 8

I like this infographic quite a bit. It’s pretty sad that the average American is hardwired to make bad financial decisions. Even though I would consider myself pretty knowledgeble with investing, I still tend to be on the conservative side.

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    Grayson says July 9

    It makes sense after reading the infographic. Investing can be tricky as it is playing with hard earned money and your emotions can start running the show.

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GamingYourFinances says July 8

This is why we have a solid investment plan. It’s not bullet proof, but a good plan does help reduce the risk of making some of these bad decisions.

BTW, the first quote from Kahneman is exactly why I invest in index funds. If the pro’s can’t beat the market on a regular basis then what chance do I have?

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    Grayson says July 9

    It is a good practice to have an investment plan. I am working on creating one for myself.

    I like index funds as well and that is a reason why I invest in them.

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Michael @ The Student Loan Sherpa says July 8

This is such a cool graphic. I don’t know if I’m hardwired to make bad decisions or not. Hopefully, I can overcome any negative predispositions that I have.

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    Grayson says July 9

    I guess you never really know until you make the bad decision, but with investing, it can really cost you.

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Martin says July 9

Grayson,
I have tried myself trading and investing. If you have plenty of time to sit behind the computer analyzing the stock you want to trade and enough money you maybe able to beat the market. But you really need cash to be able to do it. I tried when I was under-capitalized and then even a small loss can hurt you seriously and if you take a few small losses you can wipe out your portfolio quickly. So it turned out not to be a strategy for me.

Then I turned into investing (basically all those guys listed in the graphic are investors, not traders) and then you slowly build up your portfolio by adding cash and reinvesting gains. You can chose from two major strategies – growth investing, or value investing. With growth strategy you are buying stocks hoping they gain in value over time (and you may even hit a home run and ten fold your account), with value investing you try to buy old solid companies when they are undervalued and they typically pay dividends (with this strategy you mostly never hit a home run). But, many studies proved that dividend investing beat all other strategies over a period of several years by several miles. All you have to do is buy solid dividend paying stocks, collect and reinvest dividends and wait. Easy simple and powerful. As those companies raise their dividends over time, their stock also tend to growth by a same rate (for example, if the dividend grows by 9% annually then the stock price tends to grow by 9% annually too.). Take a look at JNJ stock for example. I bought when it was priced at $58 a share. Now it is priced at $88 a share. Considering that this stock is a huge behemoth, which should be a lazy stock, heck that is a 51% gain already! If you add dividends I collected over time to this gain, my overall gain is in a range of almost 150% (I do not have an exact number yet, but soon will calculate this). I was never able to get such gain by trading stocks!

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    Grayson says July 9

    Thank you for the feedback Martin. I have wanted to jump into dividend stocks for some time, but need to learn more about some of the good companies.

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Elvin @ Journey To Millions says July 9

Thanks for sharing the infographic Grayson. It’s easier to understand statistics with the use of visuals.

It really takes a lot of emotional intelligence every time we see dips in our current portfolio. It’s a skill that we should learn. I remembered the first time I invest in the stock market, I panicked seeing my portfolio all in red. I don’t know what to do so I sell at a loss. Good thing my fund was still small back then. Based on my experience, we are really hardwired into bad investment decisions.

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    Grayson says July 9

    You are most welcome Elvin. Investing should be about facts and information. We should learn to keep the emotions out of it, but that is much harder said than done. Emotions and money go hand-in-hand with most people.

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Tie the Money Knot says July 9

Just looking at the returns by those star investors, it’s remarkable what they were able to do. Can you imagine beating the market by 13% annually? I ran the numbers quickly, on a scenario where somebody started with $100k and invested I over that 35 year period noted in the infographic for Buffet. At 13%, that money would grow to over $7 million! And that’s at 13%, which doesn’t take into account that the 13% figure actually represented how much he was beating the market. Rate of return matters big time.

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    Grayson says July 12

    They have done some crazy things with their money, but it isn’t anything that regular people can’t do. You just have to be diligent with your choices. I know it is hard to take emotions out of investing for many, but that is the only way to win the game.

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Suzanne says July 10

Very interesting infographic. A lot of work went into that! I’ve always been aware of “value” versus the hottest and newest thing. I guess I’m closer to Warren Buffet’s style of investing than anything else. Lots of good points in the comments here too.

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    Grayson says July 12

    Not many people understand the value investing principle. They hear about a quick way to make money and then they fail.

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thepotatohead says July 10

I’ve definitely fallen hard for the throwing good money after bad, and thinking cheap stock = good value. Gotten burned a few times throwing money after bad pennystock choices, Mainly video companies…remind me to never ever ever invest in one again lol.

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    Grayson says July 12

    Sorry to hear that potato head. DON”T INVEST IN VIDEO COMPANIES! Is that a good enough reminder? 😉

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Alex@CreditCardShoppe.com says July 12

I don’t know if i would say we are hardwired to make good or bad decisions, but what i would say is that when we make an investment decision based on emotion rather than fact we are asking for money. Bad investment decisions happen when people become greedy. It’s best to take a step back and objectively evaluate the investment option – also ask a mentor for advice.

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    Grayson says July 14

    The problem is that most people do make decisions based on emotion, not on facts or math. Emotions run most people’s money, including my own, so then I would say that we could be hard-wired to make bad investment decisions.

    Reply
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