Financial Education

People often believe they can influence the outcome of events that are outside their control, such as by wearing a lucky jersey when watching a football game. Helping foster such an illusion in investing are several factors:

• Choice – those who choose their own investments believe they have more control than those for whom the decisions are made.
• Outcomes – positive early outcomes increase investor confidence to a greater degree than negative outcomes reduce confidence.
• Familiarity – the more investors trade, the more control they believe they have.
• Information – the more information available, the greater the sense of control.
• Involvement – active participation in investment groups, etc. foster a greater sense of control.
• Past success – during bull markets, investors often misinterpret luck as skill.

Source: Psychology of Investing, The (2nd Edition)

For more information, see all articles on: Active Management, Behavioral Finance, Investing in Stocks, Investment Returns, Portfolio Management

See also:

Performance Evaluation

Country Risk Between Emerging and Developed Economies

Time Weighted Rate of Return vs. Money Weighted Rate of Return

Direct Investments in Real Estate

Strategic Asset Allocation Concerns for Defined Benefit Plans