The Psychology of Investing

Investors need to pay a great deal of attention to what influences their behavior. Three tendencies are particularly relevant for investor: consistency and commitment, social validation, and scarcity.
Psychologist discovered that after bettors at a racetrack put down their money, they are more confident in the prospects of their horses winning than immediately before they placed their bets. After making a decision, we feel both internal and external pressure to remain consistent to that view, even if subsequent evidence questions the validity of the initial decision.
So an investor who has taken a position in a particular stock, recommended it publicly, or encouraged colleagues to participate, we feel the need to stick with the call. Related to this tendency is the confirmation trap: post decision openness to confirming data coupled with disavowal of denial of dis confirming data.One useful technique to mitigate consistency is to think about the world in ranges of values with associated probabilities instead of a series of single points. Acknowledging multiple scenarios provides psychological shelter to change views when appropriate.
There is a large body of work about the role of social validation in investing. Investing is an inherently social activity, and investors periodically act in concert. Awareness of breakdowns in the diversity of opinion and respect for extreme valuations can help offset the deleterious impact of social validation.
Finally, scarcity has an important role in investing (and certainly plays a large role in the minds of corporate executives). Investors in particular seek informational scarcity. The challenge is to distinguish between what is truly scarce information and what is not. One means to do this is to reverse engineer market expectations- in other words, figure out what the market already thinks.