The Biggest Myth in Behavioral Finance

Why most behavioral finance advice weighs you down instead of helping you.

No TL;DR this time. It would ruin the payoff. I’ll give you the conclusion up front and let the story do the work:

Without emotion, you’re less rational, and you end up losing more and winning less in economic decision-making.

The study I’m about to discuss is so counterintuitive that we need to be on the same wavelength from the very beginning.

The best part is that we’ll only need a few cards.

So please set your intuition aside for a few minutes, and let’s look at one of the most striking findings I’ve come across in cognitive science.

I Want to Play a Game

You have four decks of cards in front of you. Each card in each deck is associated with both a gain and a loss.

Your goal: earn as much money as possible over 100 draws.

Here’s an example of what happens when you draw a card.

The gains aren’t distributed randomly across the decks. Of course, participants don’t know that.

There are two types of decks:

• Two “dangerous” decks, 1 and 2, with many large gains at the beginning but even larger los…