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Here we see a general picture: stocks have worse "worst years," but their returns are higher over long periods of time. Source: Vanguard

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Myopic loss aversion is...

Myopic loss aversion refers to loss aversion caused by frequently evaluating outcomes.

An example of myopic loss aversion is...

An example of this that manifests itself in investors of the stock market is as follows. The more someone follows the stock market ticker regularly, the more that person will be convinced that the stock market is volatile. Myopic loss aversion can affect the investor's choice when constructing their portfolio, for example the distribution between stocks and bonds invested.

This is a good example because...

Myopic loss aversion leads to people making non-optimal investment moves. Many investors wade into the stock market in the hopes of achieving long-term returns. Some know that it is better buy and hold or that trading less is better and even underline this as part of their investment philosophy. However, constantly checking their portfolio's current returns can muddy the goals they set out for, causing them to neglect their laid-down philosophy especially when things don't look that sunny at the moment.

Sources

Thaler "Mental Accounting"

Common Stocks and Uncommon Profits by Philip A. Fisher, pages 40-43 (Book)

https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/myopic-loss-aversion/

https://www.financialsamurai.com/historical-returns-of-different-stock-bond-portfolio-weightings/

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Current costs are sunk. This makes us more likely to sink ourselves even further. Source: BigThink

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Sunk costs are...

Sunk costs refers to the cost expounded that cannot be recovered. The sunk cost fallacy, a related concept, refers to the tendency of people to hold onto and continue their sunk costs because of the initial cost invested.

An example of sunk costs is...

It is not uncommon for people to buy a stock that turns out to be a bad investment. The stock has not been making positive returns and upon further analysis, it appears the company behind the stock is losing their market to competitors.

This is a good example because...

Even the best and most legendary investors have all chosen a fledging stock at some point in their careers. However, what separates those who lose some money and those who lose their shirt is the ability to recognize and control sunk costs. If someone continues to hold on to this investment solely based on wishful thinking or the initial cost of investment, the sunk costs can continue to sink more.

Sources

Thaler "Mental Accounting"

https://www.investopedia.com/terms/s/sunkcost.asp#:~:text=A%20sunk%20cost%20refers%20to,spent%20and%20cannot%20be%20recovered.&text=Sunk%20costs%20are%20excluded%20from,the%20outcome%20of%20a%20decision.

https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/sunk-cost-fallacy/

https://bigthink.com/jazzy-quick/sunk-cost-fallacy-a-new-twist-in-cognitive-bias

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See Sources for a link to an article for some bad advice I've heard people say in real life over the years. Source: Frugaling

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Embeddedness is...

Because social relations are inherent in behavior and institutions, it is wrong to talk about them as independent from social relations. In terms of economic sociology, embeddedness refers to the marriage of social relations and economic activity, i.e they are not autonomous from each other.

An example of embeddedness is...

An example of embeddedness in stock market behavior is when someone buys the stock of a company at least partially due to the fact that someone in their close network is enthusiastic about the stock. This can be family members, friends, significant others, etc.

This is a good example because...

Granovetter says that economic action is embedded in networks. In many instances, people don't choose the best stocks based on their rational criteria (guidelines for choosing stock). It is possible that upon further looking, a more appropriate stock could be chosen. Still, many people act on stock market advice gleaned from the people closest to them in their network, offering undue influence caused by social relations. We can see that some stock market purchases don't add up to a purely anti-substantive view of economic activity.

Sources

Granovetter "Economic Action and Social Structure: The Problem of Embeddedness"

https://frugaling.org/worst-investment-tips/

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I'd been following the stock market for years by the time I could finally invest on my own. It used to cost $50 a trade with a major broker, and the fees were cost prohibitive. I waited and waited for fees to decline. Instead of trading, I researched stocks and followed prices.

When companies like E*Trade and Ameritrade were born, they slashed trading fees to a manageable $10 to $15. Suddenly, investing became a tool for a greater population. I was a teenager when I made my first trades.

Actually buying and selling - pulling the trigger on a stock - took little of my time. Most of it was spent reviewing reports and books. I read like mad from economics and investing books.

For last 15 years, I've heard some comically bad advice. It's flown in the face of everything I've read. Sometimes it's senseless; at other times, dangerous. If you hear this "advice," run.

1. Buy low and sell high

I've heard this unhelpful tidbit more times than I can count. Usually, it's repeated by people who understand what the stock market is: a place to buy and sell. But they hardly understand the how.

To actually "buy low and sell high" is far more complicated. The cliché presumes you can spot a low point or "bottom," have money ready to invest, and "call" the bottom by buying in. Unfortunately, this advice can also encourage people to look for "high" points or a market top or a bubble.

Few people - statistically speaking - can accurately call bottoms and tops. Even the most trained professionals fail over and over again. CNBC anchors, analysts, and commentators regularly preach markets as being oversold and/or overvalued, but rarely are their comments checked - veracity analyzed.

While the guidance is right, I call this bad advice because it doesn't make you a better investor. Despite the intention, this statement doesn't help you find lows and highs.

2. Penny stocks lead to significant returns

Amidst this culture of capitalism, get rich quick schemes are everywhere. The stock market, with it's daily returns and losses, is something of a casino for the world. With one big trade, you could be rich; at least, that's what might be sold to you with "penny stocks."

Penny stocks are less than $1.00 and often traded on the OTCBB - an off-market, poorly regulated exchange for little-known companies. Online scammers and tricksters tell potential investors about their regular returns and successes.
Can you believe they made a 1000% gain in a week? T hey became a millionaire overnight!
They'll tell you to invest in companies - with little capital needed - and get ready to profit big time. Unfortunately, there's no reliable way to get rich quick. Penny stocks are a surefire way to lose money. Never listen to those who are swept up in the potential percentage gains of a company's 50-cent shares.

3. Buy the upgrade, sell the downgrade

Stock analysts might be my least favorite market players. Their salaries and decisions are closely tied to major investment banks, which can lead to a bias in their decision making. Allow me to catalogue some of my concerns.

Firstly, their decisions immediately affect stock prices - regardless of the veracity of the claims.

Secondly, many analyst ratings are a buy - all the time. Regardless of market changes, being on the sell side isn't rewarded within investment banking companies and predicting a negative downturn is inherently risky when the market tends to go up.

Thirdly, they frequently make positional shifts without lowering prices. For example, let's say Netflix is 95.90 per share today. A stock analyst might downgrade their position to sell, but keep a $105 price target. So, as an average investor are you supposed to hold onto that position or sell it?!

For most investors, these recommendations don't make much sense. And trading off of them is an acknowledgement of a "rational" market. But the markets are anything but rational. Emotions constantly affect market capitalizations, and these analyst ratings fail to capture passion.

4. The entire market is going to collapse

Every day, week, month, and year there's another threat to market returns. Maybe there's a terrorist attack, climate change, mortgages bubbles, credit card debt crashes, unexpected bankruptcies, etc. All of these events can cause market disturbances, and even more, market mavens peddling "end of days" hypotheses.

In 2009, a powerful documentary came out called . The film interviewed a charismatic man named Michael Ruppert. He speaks emphatically about the concept of peak oil and how he alone predicted the market crash of 2008.

That's right, Ruppert, of all men, predicted it all! And when the movie was published, most of the American public was convinced oil would forever escalate. It sat around $70 to $80, and would soon go to $100 per barrel. Ruppert was considered a genius.

His prediction was that the economy would collapse and we'd have to change our why of life - drastically.

But it never came. Instead, oil markets plummeted over the last seven years since the documentary, and Ruppert... well, he died by suicide in 2014.

Investors and abstainers frequently entertain these end of days ideas because it justifies wild investments in commodities or a wholesale avoidance of the stock market. Both decisions put portfolios in peril. Best to keep a moderate perspective and diversify your portfolio.

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The 4 Worst Investment Tips You'll Ever Hear - Frugaling

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I'd been following the stock market for years by the time I could finally invest on my own. It used to cost $50 a trade with a major broker, and the fees were cost prohibitive. I waited and waited for fees to decline. Instead of trading, I researched stocks and followed prices.

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Here we have two of the same products for the same product. Rational choice theory dictates that we should go for the 75 cent manilla divider. Source: Alamy.

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Rational choice theory is...

Rational choice theory refers to the belief that economic actors' actions are fundamentally rational. Actors make decisions by weighing the costs and benefits of each action.

An example of rational choice theory is...

Rational choice theory manifests itself in the main actions of stock market participants: buying or selling. If people think the cost of a security is low relative to its future worth, people will buy; conversely, if people think the cost of a security is too high relative to its future worth, people will sell or short-sell.

This is a good example because...

People engage in the stock market because they want to maximize their chances of making money. Investors often come up with a set of criteria that they believe can evaluate the value of one's stock relative to price. From their reasoning, they rationally make moves after weighing the costs and benefits. They buy a stock because they believe that it will be beneficial to them to obtain a stock for lower than what it is worth, and sell because they believe it is beneficial to cash out when the price is higher than the perceived value. Holding a stock, then, is done when it will cost more to sell than to hold.

Sources

https://www.investopedia.com/terms/r/rational-choice-theory.asp

Scott et. al "Rational Choice Theory"

https://www.alamy.com/stock-photo-same-item-for-sale-at-different-prices-310864078.html

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Beta, created by academics, became a popular model that influenced many stock market decisions. Source: Corporate Finance Institute.

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Performativity is...

Performativity is the concept that economics does not describe an external economy. Rather, economics creates the phenomena that is used to describe economy.

An example of performativity is...

An example is the capital-asset pricing model (CAPM). CAPM is a model used to evaluate risk in portfolios.

This is a good example because...

CAPM was revolutionary when it was first purveyed and it remains in usage today. Essentially, CAPM changed old thinking on Wall Street concerning risk and diversification. Old thinking dictated that the beta, or systematic risk of a portfolio was dependent on individual securities in a portfolio. CAPM said that only the systematic risk of an entire portfolio mattered because diversification would render the systematic risk of individual securities irrelevant. This model led to new thinking, creating specific economic behavior and phenomena; in other words, performing economy.

Sources

https://www.investopedia.com/terms/c/capm.asp

Mackenzie and Millo "Constructing a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange"

A Random Walk Down Wall Street by Burton Malkiel, pages 209-213 (Book)

https://www.econstor.eu/bitstream/10419/155847/1/vol06-no02-a6.pdf

https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-capm-formula/