The 5 most common investment mistakes

This is my list of the 5 most common investment mistakes:

Mistake #1: Relying too much on "noise"

The information provided by mass media influence investor choices. In this perspective, Farina et al. 2017 evidence that mass media information is important not only for its novelty but also for its effects on investor sentiment. Two consequences: i) more information does not automatically lead to more accuracy and could increase investors' overconfidence; ii) short-term investors are more subject to noise.

Mistake #2: Failure to update beliefs when new information arrives

“Beliefs are hypotheses to be tested, not treasures to be protected” (Tetlock and Gardner 2015 - Superforecasting: The Art and Science of Prediction).

Mistake #3: Favoring the "inside view" over the "outside view"

Relying on our specific circumstances and searching for evidence in our own experiences ("inside view") leads to optimistic forecasts. Anchoring is one of the most robust biases of judgment. Looking at similar situations that can provide a statistical basis for making a decision ("outside view") mitigates the problem. For further details see: Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011).

Mistake #4: Failure to think in probabilistic terms

Warren Buffett summarizes this point very well: “Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect, but that’s what it’s all about”.

Mistake #5: Failure to recognize that in the short-run the link between decisions and results can be very weak

Over the long-run good decisions could provide a much higher chance of desirable results.