Why High-IQ Investors Still Make Costly Mistakes
Smart investors don't fail because they lack intelligence. They fail because they rely on the wrong mental gear. In Behavioral Finance: The Second Generation (CFA Institute Research Foundation), Meir Statman explores why even the most sophisticated professionals make predictable, systematic mistakes. Here is the breakdown in 3 key insights: 1. Shortcuts vs. Errors (System 1 vs. System 2) The human brain is a "cognitive miser" designed to conserve mental energy. Cognitive Shortcuts (Heuristics): Rapid, intuitive "rules of thumb" driven by System 1 . They help simplify choices—such as interviewing only 3 contractors or screening for 4-star mutual funds. Cognitive Errors: Occur when a shortcut is applied to a complex problem where it doesn’t belong. System 1 jumps to conclusions, and a lazy System 2 blindly approves it without doing the math. 👉 Example: A stock crashes 50% and then rebounds 75%. Gut intuition (System 1) says you’re up....