Understanding Cognitive Traps
Our minds often take mental shortcuts that can lead to systematic errors in judgment. Recognizing these patterns is the first step to making more rational investment decisions.
Sunk Cost Fallacy
When we continue to invest in something simply because we've already invested time, money, or effort, rather than evaluating its future potential.
Availability Bias
Overemphasizing recent or memorable market events when making investment decisions, while ignoring longer-term patterns or less dramatic data.
Mental Accounting
Categorizing money differently based on its source or purpose, leading to inconsistent investment decisions.
Status Quo Bias
The tendency to stick with current investment positions, even when change would be beneficial.
"The first step in avoiding a trap is knowing of its existence."
Breaking Free from Cognitive Traps
Understanding these mental pitfalls allows investors to:
- Question their initial reactions to market events
- Develop systematic decision-making processes
- Maintain perspective during market volatility
- Make more objective investment choices