Cognitive Errors in Investment Decisions

Behavioral finance plays a significant role in understanding investor behavior and decision-making in portfolio management. One important subcategory is cognitive errors, which refer to systematic mistakes made by individuals due to reasoning flaws. These errors can impact investment decisions and lead to suboptimal portfolio performance.

Consider the following scenario:

Jane is a long-term investor who was drawn to aggressive growth stocks during a market uptrend. As the market experiences volatility, her confidence begins to wane. Despite having a well-researched investment strategy, Jane finds herself second-guessing her choices and focusing on past losses rather than future opportunities. This situation reflects common cognitive errors that can affect investor behavior.

In your essay, identify two cognitive errors that Jane is likely experiencing and explain how these errors could affect her investment decisions. Provide examples to support your analysis.