The Bandwagon Effect: This is the one that causes the most pain in a bubble. It's the idea that it's okay to follow the herd because so many other people believe in it. It's irrational because it places its faith in the safety of numbers, while completely disregarding the fundamentals. Without it, a bubble is impossible.
Loss Aversion: People to have a strong preference for avoiding losses over acquiring gains. It's the fear that puts them on the sidelines to stay.
Disposition Effect: This is the tendency for investors to lock in gains and ride out losses. It prompts the sale of shares that are rising, while at the same time keeping investors tied to losers for far too long. It's closely tied to loss aversion, since it's the fear of loss that dominates the thinking.
Outcome Bias: Judging a decision by its outcome rather than the quality of the decision at the time that it was made. This is what makes investors completely disregard a proper decision if it turns out to be a loss.
Sunken Costs Effect: Treating money that has already been spent as more valuable than money that may be spent in the future. It's what helps to build up losses because the investor believes that by selling at a loss he is wasting money. That same money could be put to use elsewhere.
Recency Bias: Weighting recent data more heavily than earlier experiences. It's what freezes investors — especially after a series of losses — even though there may be a much longer string of successes in the past.
Anchoring: This is the tendency for people to rely too heavily on readily available information when making a decision. Investors often base their decisions on information that may be faulty.
Belief in the Law of Small Numbers: This is when investors base their conclusions on a slice of data that is too small. It's the equivalent of making mountains out of molehills, and it blurs reality.
Endowment Effect: People tend to value something more once they own it. As in housing, people tend to overvalue what belongs to them. Of course, this only blinds to them to the real value.
Disconfirmation Bias: This makes people critical of information which contradicts their beliefs while uncritically accepting information that is in line with them. In short, it's a trap whereby people believe what they want to believe.
Post Purchase Rationalization: This when investors persuade themselves through rational argument that a purchase was a good value. Of course, if a decision needs to be rationalized after the fact... it is probably wrong.
You’ve been peeking in my portfolio, haven’t you?