Many amateur investors stick to active strategies, even when the evidence shows that “it’s more than likely to be a fool’s errand,” because we allow mental shortcuts to lead us to mental errors. This according to a recent Wall Street Journal article by finance professor and author Meir Statman Ph.D.

Many amateur active investors think of stock trading as a skill that they will get better at with time and practice, Statman notes, which is the wrong way to look at it: “traders always face competing traders on the other side of a trade, sometimes inducing them to choose the wrong trading strategy.”

Statman offers several insights, including the following:

• Overconfidence—People tend to place themselves above average when tasks are easy (like driving) but tend to view themselves as below average regarding difficult tasks (like juggling). “For many investors,” Statman writes, “trading stocks seems more like driving than juggling,” adding, “however, if they measured their abilities against possibly better opponents on the other side of the net, their confidence levels would be more aligned with their abilities.”
• Foresight versus hindsight—Active investors often confuse the two, Statman argues: “They believe that if they have been fortunate (read: lucky) enough to have predicted previous ups and downs, they will do so again.”
• Evidence— “One of active investors’ biggest mistakes is searching for evidence that will confirm their beliefs, while neglecting or assigning less weight to evidence that disputes what they think.” Therefore, Statman notes, active investors focus more on gains than they do on losses.
• We don’t know what we don’t know—“We assess the probability of events by information that is readily available in our minds,” writes Statman, adding, “That becomes a problem when there’s an enormous amount of information that isn’t available—and we aren’t aware of its absence.”
• Motivation—The article cites a Fidelity survey of amateur traders that revealed 54% enjoy “the thrill of the hunt, while 53% enjoy learning new investment skills, and more than half enjoy sharing trading news with family and friends. “In short,” Statman clarifies, “they invest not just for profit, but also for the fun of playing and the hope of winning.”