Behavioural economics is often touted as a brand new field of investment science. But in fact, an understanding of our all-too-human investment errors can be traced back to 17th-century Amsterdam, notes the Psy-fi blog.
Confusion de Confusiones was written by Joseph de la Vega in 1688. Any active investor will recognise several of the poet and merchant's conclusions from his study of the Dutch stockmarket.
He noticed, for example, that even when a share is practically worthless there are still "people willing to close their eyes", forget the fundamentals and chase the crowd. People tend to herd together and chase expensive shares up while selling cheap stocks in a panic the reverse of what they should do.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
De la Vega also recognised that we're generally too confident in our abilities investors "will sell without knowing the motive; and they will buy without reason". Homework and attention to detail get substituted for gut feel and ego.
He also picks up on regret aversion', whereby we cling on to losers too long, hoping to get something back. His advice was simple, notes the Psy-fi blog: "sell when you make a profit, you never know what might be just around the corner".
The message for today's investor as well as for those from the 17th century boils down to: ignore the crowd; base investment decisions on fact not ego; don't waste time crying over past errors. It sounds simple, but the fact we're still making mistakes more than 300 years later shows just how tough it really is.
-
Family investment companies explained: how the ultra wealthy shield their money from the taxmanWealthy families are increasingly turning to family investment companies to keep more of their money away from HMRC – but what are these arrangements and how do they work?
-
How to boost your pension pot as 35% of UK over 50s face huge retirement savings gapOver 50s are facing a later life with little to no funds - but there are steps you can take now to boost your pot.
