3 Self-Defeating Investor Behaviors: Franklin Templeton

"As humans, our thinking is strongly influenced by what is personally most relevant, recent or dramatic," says the Beyond Bulls & Bears comment. "As investors, this can translate into perceptions colored by personal experiences that likely represent only a fraction of the complete economic picture. As an example: availability bias means that a person whose home has lost 20% of its market value and whose spouse endured a long period of unemployment is less likely to see or feel an economic recovery even while housing markets show signs of recovery and unemployment ticks down."

Beyond Bulls & Bears goes on to quote Ariely, a Duke professor and author of Predictably Irrational: The Hidden Forces That Shape our Decisions, who asserts that a financial advisor could create different biases, depending on how he or she might frame a discussion about risk.

"Imagine if I was a financial advisor," Ariely says, "and you came to talk to me about your risk attitude, and I started the discussion by asking you to describe how you felt in the last three years on the days when your portfolio lost 5% of its value. Then I asked you what your risk attitude was. Most people would say they don't want to ever experience days like that again. On the other hand, what if instead I talked about people I knew who were retired and living in the Bahamas, fishing and golfing? Now your risk attitude would probably be different."

3) Herding. Many consumers assume the consensus view is the correct one and follow the crowd whether they're looking to buy a new phone or to invest money for retirement, Franklin Templeton's Beyond Bulls & Bears editorial team notes in "Getting Trampled by the Herd."

Chasing the market can lead investors to buy when prices are too high and sell when prices are too low. But on the flip side, value hunters can often find bargains if they move away from the crowd.

"The word 'contrarian' has a surly ring to it, but the idea of zigging when others are zagging is actually the foundation of the basic buy low/sell high investing strategy," Beyond Bulls & Bears says. "The late Sir John Templeton had plenty to say about this type of behavior. One of his more famous lines: 'Avoid the popular. When any method for selecting stocks becomes popular, then switch to unpopular methods.'"

Read The Upside of Irrationality, Investment Advisor's cover story on Dan Ariely, at AdvisorOne.