Over confidence is a characteristic that leads us to overestimate our ability to predict market events. This bias leads to over-trading, as we try to take advantage of market opportunities which can lead to poor investment choices.  Related to overconfidence is hindsight bias, that we have predicted an event, when in fact we didn’t.

Overreaction is a tendency to be too heavily influenced by random occurrences.  The mind is a pattern-seeking machine and people are strongly biased to assume that there was some cause at work behind any notable sequence of events (Kahneman and Riepe [1981). The result can be that we over-interpret patterns that are actually coincidental and are unlikely to persist. Overreaction is often at work when we are tempted to buy high and sell low.

Belief perseverance is our attraction to staying with a belief even when contrary evidence presents itself. Too often we are reluctant to search for evidence that is contrary to our existing beliefs and to be very skeptical of evidence that challenges our current long held beliefs.

Regret Avoidance is the inclination to avoid action that might make us uncomfortable with our earlier decisions even though those actions we avoid may be in our best interests. This bias manifests itself when investors hold onto losing investments longer than they keep winning investments.

To mitigate the negative effects of our very human bias’ the approach I use to help my clients reach their goals is to use a goal-based investment system where the focus is shifted from market performance to measuring progress toward goal achievement.  One example might be that I need $350,000 in 12 years to produce the income I need to meet certain living expenses.  When we work with an adviser who focuses on helping us gain greater clarity of purpose and define what we are trying to achieve, the less likely we are to be pushed and pulled into different directions as markets go up and down - as we know they will.