Chronic poor investment decisions are typically the result of poor money scripts and cognitive distortions, rather than about luck or opportunities.
Emotions and faulty thinking (“cognitive distortions”) often are more important than rational decisions when making investments, and can sway investors and markets.
A poor investing script is reflected in Warren Buffet’s well-known observation that “Investors pay a very high price for a rosy consensus.”
In addition to the money scripts discovered by clinical psychologists – and those that are commonly bantered about in the investment media -there is another set of unconscious motivations that have been uncovered by academic psychologists and economists who study “Behavioral Finance.”
Behavioral Finance is the study of how social and psychological factors irrationally influence the way people spend, invest, and save money. Many ideas of Behavioral Finance have been tested by excellent research.
An example of Behavioral Finance research is the finding that after losing money on a risky gamble or investment, most people tend to take an even higher risk on their next investment or gamble. This is probably because people experience a dollar of loss more intensely than a dollar of gain, and so deny the greater risk in their effort to regain their loss.