Studies highlight investment mistakes

Why do people make so many money mistakes?

Financial ignorance plays a role for many, and so does a general inability to predict the future direction of the economy, stock market and so on.

But emotions also factor into the equation. More researchers are looking at psychological explanations that discourage people from making wise, rational decisions. Several recent studies help shed light on why people behave as they do.

Poverty and lotteries

Doesn’t it seem that a lot of lottery tickets are sold in low-income neighborhoods? Researchers at Carnegie Mellon University in Pittsburgh affirm that poor people spend a larger portion of their incomes on lotteries in the slim hopes of hitting a life-changing windfall, even though the expenditures often make things worse.

“Some poor people see playing the lottery as their best opportunity for improving their financial situations, albeit wrongly so,” said the study’s lead author, doctoral student Emily Haisley, in a statement.

Irrational investors

If it seems the stock market’s wild fluctuations of late point to a lot of confused investors, it’s probably true. A new study in the Journal of Financial Service Professionals makes the case that investors often don’t behave rationally.

By examining mutual fund cash flows over a recent 10-year period – transactions that reveal buying and selling decisions by millions of investors – researcher Somnath Basu of California Lutheran University noted widespread irrationalities in investor behavior. These included a desire among many people to avoid losses at almost any cost and a tendency among investors to be strongly influenced by trends and the behavior of others, rather than their own financial situation.

Dividends good to spend

If your investments earned 10 percent in a year, how likely would you be to retain the assets or spend them? The answer may depend on whether your return came in the form of dividends or capital gains.

Stefan Nagel of the Stanford Graduate School of Business studied thousands of brokerage account statements and other data and found investors are more likely to spend dividends while retaining capital gains.

“They don’t necessarily expect capital gains every year, but they do come to expect dividends,” Nagel said. Most people seem to follow a general rule of “not touching their capital.”