Representativeness and Investing

A good company is not necessarily a good investment. Investors tend to think one equals the other. People also make representativeness errors in financial markets. For example, investors often confuse a good company with a good investment. Good companies are those that generate strong earnings and have high sales growth and quality management. Good investments are stocks that increase in price more than other stocks. Are the stocks of good companies good investments The answer may be no.1...

Cognitive Dissonance

Psychologists have studied specific consequences of memory problems. Consider that people view themselves as smart and nice. Evidence that contradicts a person's image of being smart and nice causes two seemingly opposite ideas. The brain is uncomfortable with the poor self-image. Psychologists call this feeling cognitive dissonance. To avoid this psychological pain, people tend to ignore, reject, or minimize any information that conflicts with their positive self-image. Evidence that cannot be...