“We have met the enemy and he is us.”
—Pogo (via cartoonist Walt Kelly)
Famous investor John Templeton once said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
Given Templeton’s indisputable success as an investor, few would argue with this appeal. However, like much in life, this behavior discipline is easier said than done. Research shows that people tend to make rational decisions in small matters and poor ones where much is at stake. Why? Because we’re human. As humans, we are burdened with a series of nearly inescapable cognitive and emotional biases that drive us to respond to stressful events like the stock market’s ups and downs in a way that harms our financial well-being. While numerous, this article will work to consider just one: Hindsight Bias.