Among the many quirks our brains have is something called the “fading affect bias.” Basically, we aren’t very good at remembering negative emotions. Our brains shrink the memories of bad times, painful experiences and anything generally unpleasant.
That is generally a good thing.
But could it be that we carry this bias into our portfolios as well.
That is generally a dangerous thing.
Two main ways this bias can lead us astray
ONE: The fading affect bias (and its cousin, optimism bias) promotes speculation.
Imagine you speculate on a high-flying small cap green-tech stock and it gets obliterated. If you held on to the pain of that past loss, you might be discouraged from such foolishness again in the future. But when your biases kick in, you could be tempted to minimize the pain of that experience and allow yourself to be distracted by pleasant memories of your …Read the full article →