Stocktake: Investors inflate their gains

Many investors are prone to inflating their gains and forgetting their losses

While many Robinhood investors have learned they’re not as good at investing as they thought, many more investors keep trading and keep making the same mistakes. What’s going on in such cases? A paper published last year in the Psychological and Cognitive Sciences journal offers some clues. The researchers asked investors to recall the performance of their most important trades over the past year. After answering, investors were asked to check their financial statements to determine their actual performance. On average, investors thought their trades had gained eight percentage points more than they actually did. They were also much more likely to forget their losses than their gains. It seems we’re prone to inflate our gains and forget our losses. That’s good for the ego, but it breeds overconfidence and over-trading. A simple tip, then, is to check your past financial statements — you might not be as good as you think you are.

Proinsias O'Mahony

Proinsias O'Mahony

Proinsias O’Mahony, a contributor to The Irish Times, writes the weekly Stocktake column