We are all susceptible to cognitive errors and misleading emotions: overconfidence, hindsight, exaggerated fear, and unrealistic hope. Yet we do not go out of our way to commit cognitive errors and be misled by emotions. Instead, we do so on our way to what we want.
We want more from our investments than profits greater than risks. We want to nurture hope for riches and banish fear of poverty. We want to win, be #1, and beat the market. We want to feel pride when our investments bring gains and avoid regret when they inflict losses. We want the status conveyed by hedge funds and the virtue conveyed by socially responsible funds.
Identification of investors’ wants and distinction between wants, cognitive errors, and misleading emotions matter to all investment professionals, from financial advisors to plan sponsors and money managers.