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Summary

This information is very timely because the current investment environment magnifies your psychological biases. Several powerful forces have affected investors recently. First, a strong and extended economy has created disposable income for millions of new people to enter the investment world. Most of these new investors have little or no formal education in investing. Second, this economy has spurred one of the longest and strongest bull markets in history. These new investors could have mistakenly attributed their high investment returns to high ability instead of to the result of investing during a bull market. Third, the rise of the Internet allows you more participation in the investment process by trading, researching, and chatting. Finally, a bear market has ravaged the portfolios of many investors who got carried away with their emotions and chose investments that were far riskier than they believed them to be at the time. These four factors allow your natural psychological biases and emotions to flourish and to affect your investing decisions.

Your psychological biases and emotions can lead you into trouble if you allow them to invade your investment decisions. The problems detailed in this chapter affect everyone. However, you can minimize their effect by recognizing them in your own behavior and in that of others. But this is only the tip of the iceberg. The following chapters detail other tricks of the mind and misconceptions that can lead you into an investment blunder.


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