To Err Is Human (Part 2)

Cognitive errors can lead to the impression that we can take actions to beat the market, even when the odds are long.

Adam McCullough, CFA 16 May, 2019 | 9:00
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In part 1 of this article, we looked at how to manage emotional biases, here we will look at how to overcome the cognitive errors.

Overcoming Cognitive Errors

Cognitive errors stem from poor information processing and overconfidence in our ability to predict or influence market outcomes and can lead to bad decisions. For example, resisting the urge to trade when faced with new information can be tough to overcome. But you’re likely better off not trading based on “new” information that you read in Barron’s or hear on CNBC. As everyone has access to that news, it probably won’t lead to market-beating perfor­mance. Frequent trading can lead to excessive transaction costs or realized taxes, which detract from performance.

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About Author

Adam McCullough, CFA  Adam McCullough, CFA, is an Analyst on Morningstar’s Manager Research Team, covering passive strategies.

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