- Hindsight Bias
- Loss Aversion
A couple of excerpts:
Unfortunately academic approaches which aim to replicate market behavior by tweaking efficient market models often don’t translate well to the harsh, Darwinian world of real finance where people need to use these ideas to make money. Typically the models work right up to the point they don’t, when they fail catastrophically.
Looking back we believe that everything that actually happened was entirely predictable and we then project this predictability into the future. Yet when researchers study what people expected to happen and what actually did happen they find that everyone – experts and laypeople alike – are completely wrong. Even worse, we don’t recognise we were wrong and will insist, even in the teeth of the evidence, that we did foresee events correctly. As the world’s favourite intelligence gathering organisation puts it:
"[hindsight biases are] attributable to the nature of human mental processes, not just to self-interest and lack of objectivity, and that they are, therefore, exceedingly difficult to overcome."Link
This stuff is useful beyond improving investing results.