Understanding the gap in what we know we should do and why we don’t do it is essentially known as behavioral finance. Having had many economics classes I have been puzzled at what some people call what a rational person would do. And who is this rational person? Harry Markowitz a Nobel prize-winning economist didn’t follow the rational side of what his own research showed that others should do. Fortunately people like Daniel Kahneman, Richard Thaler, Schlomo Benartzi, Dan Ariely and Daniel Crosby have studied more on why we don’t do what we should do. Dr. Crosby writes:
“We as investors are always searching to make the best investment possible, to beat the market and try and secure for ourselves untold fortunes in the process. What few understand though is that all along the way, we are subject to emotional traps that make this difficult for the average investor and we actually end up doing much worse than average. For the twenty years ending 12/31/2013 the S&P 500 averaged 8.21% a year but the average equity investor earned a market return of a mere 4.25%. This emotion fueled gap between market returns and investor returns is often the difference between being able to retire or not…”
Read more at Iris.xyz.