Investing, aside from analysis and the application of specialized techniques, is closely tied to human psychology to a much greater extent than we are willing to admit.
There is an entire field known as behavioral economics that examines the impact of emotional factors on decision-making in the financial realm.
However, no matter how hard we strive to think rationally, the financial space is filled with paradoxes that prevent us from confidently asserting that we are making the optimal choice at any given moment.
Here are some intriguing paradoxes that accompany us in the process of making investment decisions:
1. The most well-known fortunes—those of Carnegie, Rockefeller, Buffett, and Gates—were amassed by owning just one asset. Yet, the most popular advice that a retail investor receives is to do the opposite: to maintain a broadly diversified portfolio of assets.
2. The stock market can be overvalued, yet it can become even more overvalued before it begins to decline. And even when it is already falling, it may still be at levels higher than they are today.
3. We build our plans based on average indicators—average stock market returns, average loan rates, average levels of inflation—while each of us lives only one life, where specific metrics matter rather than averages.
