Personal Finance Essentials
Pessimism Bias
The Psychology of Investing > Pessimism Bias
This is a lack of confidence in yourself. Many people don’t want to invest in stocks because they don’t think they’re good enough to pick the right ones.
But here’s what pessimists fail to recognize: You don’t have to pick the best, because you’re not betting on a horserace. Rather, investing is a game of horseshoes – and being close is good enough to win. When you invest in a highly diversified manner, you don’t have to worry so much about picking winners and avoiding losers. As Warren Buffet once said, “It’s better to be approximately right than precisely wrong.”
Pessimism bias also causes investors to flee the market during downturns – often at the exact moment when staying invested is most important. The investor who stays put is the one who participates in the recovery.