Meir Statman, a behavioral finance professor at Santa Clara University, notes the importance of psyches in investment behavior, likening the situation to antilock brakes. “When at high speed, the car in front of us stops quickly, we instinctively hit the brake pedal hard and lock ’em up. It doesn’t matter that all the studies show that when the brakes lock, we lose control.” Statman suggests investors need antilock brakes for their investment portfolios as well.
When the market drops, our instinctive fear to flight is so strong, even the most rational investors find themselves caving in, to their own demise. And market tops can often be called soon after the staunchest of bears throws in the towel and turns bullish.
