Top 10 Investor Errors: Cognitive Deficits

"We are entering the home stretch of our 10 part series — today, we are up to number eight.
Beyond our emotions and lack of rationality, we have an entirely different set of issues that are hard-wired into our brains: Cognitive Errors.
These are the errors that are inherent in our wetware – namely, the way your brain has evolved over the millenia. Suffice it to say that capital risk decision-making was not a big issue on the Serengeti plains. On the other hand, avoiding getting eaten by lions was.
Hence, Humans have a number of unfortunate tendencies as a result. These tend to get in our way when it comes to investing:

• We see patterns where none exist;
• We have difficulty conceptualizing long arcs of time;
• We selectively perceive what agrees with our pre-existing expectations, and ignore things that disagree with our beliefs.
• We tend to forget our losers and over-emphasize our winners.
• Our inherent optimism bias turns out to be hard-wired as well — our brains are better at processing good news about the future than bad.
• We actually get a greater thrill from the anticipation of a financial reward than the actual reward itself. (Think what this means in terms of Buy the Rumor, Sell the News)
• We seek stimulus for the dopamine high — regardless of how. Whether you are a Gambler, Alcoholic, Sex Addict, Shopaholic, or Hyper-Active Trader — its all the same buzz.
• Story-telling is how Humans evolved to share information (Pre-writing). Thus, we are vulnerable to anecdotes that mislead or present false conclusions unsupported by data.

In short, we simply are not wired for the required risk analysis inherent in investing..."

at http://www.ritholtz.com/blog/2012/07/top-10-investor-errors-cognitive-errors/