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.
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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.
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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.
