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Beware High Watermark Thinking: Understanding Cognitive Biases in Investing
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In this episode, Trevor Lawson begins a multi-part series on cognitive biases, focusing on how they impact investment decisions. Drawing from an article by Signature Investment Advisors, Trevor introduces "high watermark thinking," where investors use their portfolio's highest value as a mental reference point, making market dips feel like losses even with overall positive long-term returns. He explains that this is driven by two powerful biases: loss aversion, the tendency to feel the pain of a loss twice as strongly as the pleasure of an equivalent gain, and anchoring bias, where expectations are fixated on a specific reference point. Trevor offers strategies to overcome these biases, including embracing a long-term perspective, recognizing cognitive biases, sticking to a well-defined investment plan, diversifying portfolios, and remembering that market volatility is a normal part of investing.
Reference: https://www.seia.com/the-brew-navigating-market-volatility-beware-high-water-mark-thinking/
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