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Chapter 2. Behavioral Finance > The Investment Environment

The Investment Environment

As mentioned in Chapter 1, “Other People's Problems,” there is a worldwide trend toward people managing their own money. This can be seen from the growth in 401(k) plans and the transfer of wealth to online brokerage firms, which offer no investment advice. Investors are controlling their own investment decisions. However, this control also magnifies psychological and emotional biases.

The rise of the Internet dramatically changed the way people make investment decisions. Through the Internet, you have access to vast quantities of information. However, investors tend to mistake information for knowledge. Consider information that suggests that the day will be sunny and 90°F outside. Understanding that this information means one should wear sunscreen and drink plenty of water if going outside represents knowledge. There is a lot of information on the Internet, but very little knowledge. Mistaking this abundance of information for knowledge contributes to the problems with self-deception described above. The Internet is also full of investment advice. I discuss the recommendations of the experts in Chapter 5, “Profits from the Prophets?”


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