Should you "Follow your Gut"?
I want to profusely thank Brian Love for his excellent Behavioral Finance article in the latest issue of Financial Advisor IQ (The Incredible "Shrinking" Advisor). Love's article reiterates why the most important aspect of our profession is not securities analysis or projecting rates of return. So I title this post with the myth that you should follow your gut when choosing investment options. To the contrary.
Shown in the graphic below are the six primary mental and emotional biases investors suffer. Which cause them to experience worse returns than unmanaged indices. Wall Street & the financial media primarily exploit these biases rather than curing them.
Personally, I think the most destructive is the 5th one, a preference for Lotteries. Just look at the billions that flow into national & local government sanctioned lotteries, for example. Like any other bias-subject commodity on the market, this bias causes lotteries to be way over valued.