How Your Inner Freud Can Make You Rich

The lesson: Investors latch on to, or "anchor" on, meaningless, irrational or inadequate data to formulate decisions. For example, in May, an investor might have read that the S&P 500 Energy Index was up nearly 180% over the prior four years. He might have felt that energy stocks would keep rising and changed his investing strategy as a result. That index, however, has fallen more than 45% in the five months through Oct. 24.

The solution: There's a tremendous amount of data available on any investment. It's important to use as much as possible, rather than getting carried away with one number or source. Look at investments from many perspectives, and set goals and strategies for the long term.

Mistake No. 2: overconfidence

In 2006, behavioral economist James Montier asked 300 fund managers about their job performance. Nearly three-quarters said they were above-average, and most of the rest said they were average. Of course, only 50% could be average or above.

The lesson: Investors tend to put a lot of weight into what they do know, inflating the importance of sketchy bits of information while ignoring the big picture. For example, an investor might hear about a firm's upcoming launch of a hot product, and buy the stock without considering questions such as, "Is the new product priced into the stock?" "Does the competition have a similar product that could outsell the first one?" "Is the industry poised for a major downturn?"

The solution: Consciously consider what's missing from your understanding of a particular investing scenario. Then dig deeper, being sure to seek out information that defies your expectations.