View: 7 Ways Your Brain Makes You A Terrible Investor - Business Insider

If you think investors are rational and markets are efficient, then you are dead wrong.

"Investors are 'normal,' not rational," says Meir Statman, one of the leading thinkers in behavioral finance.

People used to think that expected investment returns were a function of risk alone (i.e. modern portfolio theory).  However, behavioral finance argues that you need to consider psychology when constructing your investment valuation models. This groundbreaking concept is so relevant that it is a major part of the Chartered Financial Analyst (CFA) curriculum.

You see, stock markets are largely driven the buying and selling decisions of millions of irrational minds.  Therefore, psychology can distort markets.

The Psi-Fi Blog (via The Big Picture) has a long list of behavioral biases that affect investor behavior.

We compiled the list of behavioral biases that are addressed in the CFA curriculum. Don't be intimidated.  You might learn something about why you invest the way you do.

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