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The PJ Tatler

by
Helen Smith

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February 25, 2013 - 4:44 am

I saw an interesting piece in the WSJ entitled, “You’re Not as Good an Investor as You Think You Are:”

Many investors have been behaving as if the bloodbath between October 2007 and March 2009, when the U.S. and global stock markets lost at least 50%, had never happened. More worrisome, investors are forgetting the agonizingly real fear they felt during the financial crisis.

That could lead some to take more risk than they should and incur losses they can’t withstand. So it is vital to evaluate whether you suffer from investing amnesia and, if you are, to counteract it before it is too late.

The information provided by psychologist Elizabeth Loftus caught my eye:

Elizabeth Loftus, a psychologist at the University of California, Irvine, says people are prone to “spontaneous distortions of memory that make us feel better about ourselves.” Studies have shown, for example, that people remember voting regularly in national elections even when they haven’t cast a ballot in at least six years and that 71% of students who earned D grades in high school later recall getting higher marks.

“One thing that might make some investors feel better about themselves,” Ms. Loftus says, “is remembering that their losses were smaller or their gains were bigger than they actually were.”

Whenever I talk with people about the stock market, they often tell me how great they are doing. I sometimes wonder if they just tell me about the stocks that made them money rather than the ones that lost them money. I still feel leery about the market even though it appears to be doing better. I don’t have the chip that causes me to forget how much I have lost there. Do you?

Helen Smith is a psychologist specializing in forensic issues in Knoxville, Tennessee, and blogs at Dr. Helen.

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