Can your memory be bad for your money?

As originally appeared in The Jerusalem Post on May 16, 2025.

“Memory is a net: one finds it full of fish when he takes it from the brook, but a dozen miles of water have run through it without sticking.” -Oliver Wendell Holmes, Sr.

Earlier this week I had a long discussion with a long-time client. We were discussing how her portfolio has performed over the years. She was telling me that she had sold most of her holdings before the sub-prime crisis in 2008, as she had anticipated a market drop, and that she had made a lot of money when she bought back into the market. Her recollection seemed a bit off to me, but I didn’t challenge her.

After the call I did some digging and found some statements from back then. Turns out the exact opposite happened. She had panicked and only after the market had already dropped nearly 20%, did she call up to sell and then proceeded to sit on the sidelines for a few years before deciding to invest again. I have calls like this more often than one might think. Investors often remember their portfolio decisions differently than they were.

Dan Pilat Co-Founder and Managing Director at The Decision Lab, discusses how we can look back at an unpredictable event and think it was easily predictable. He writes, “The hindsight bias describes our tendency to look back at an event that we could not predict at the time and think the outcome was easily predictable. It is also called the “knew-it-all-along” effect.”

I never really gave any thought to how that can impact investing until I recently came across a research paper that dealt with memory bias in investing. In a paper titled “Why Investors’ Memories May Be Bad for Their Wealth” Daniel Walters , INSEAD and Phil Fernbach , University of Colorado, discuss how selective memories of past performance actually cause current investing overconfidence. They write, “While much has been written about the dangers of such overconfidence when it comes to the financial markets, there has been less time spent discussing why it is such a common characteristic among investors. This anomaly seems especially strange when you consider how easy it is to double-check past success with a quick scan of your financial statements. The truth, as revealed by our new research, is that it could actually be down to the positive bias that investors apply to their memories of past performance. This positive spin can take two forms: distortion (the fact that someone remembers the size of their returns or loss as better than they really were) and selective forgetting (a tendency for investors to fail to remember their losses altogether).”

They continue, “We came to this conclusion following a series of studies where we asked investors how well they could recall their past deals. We first asked them to share their memories of their biggest wins and losses over a certain period of time without reference to any physical records. We then gauged how confident an investor was through a series of questions that covered their belief in their ability to beat the market and the frequency of their trading. The final step was to ask them to compare their memories of trading success against the actual outcomes of those trades.”

They discovered that “overconfident investors, those more likely to trade more often and who had the greatest self-belief in their investment skills, were actually the individuals with the largest memory bias. In other words, they remembered their wins as bigger than reality and had a greater tendency to forget their losses. Both of which helped them uphold and perpetuate their confident opinion of their ability as an investor.”

What we can learn from this is that investors should actually sit and review their past statements to actually see how they are doing. Be honest with yourself. Are you actually doing a good job or are you kidding yourself. It might not be so fun to see in black and white that you haven’t done so well, but that honesty can help you grow your wealth over the long term.

We read this week in Ethics of the Fathers (4:28) “Rabbi Elazar Hakapar would say: jealousy, lust, and [desire for] honor remove a person from the world.” The Tifferet Yisrael defines the various terms and comments, “jealousy” – out of jealousy to have as much or more than his fellow, he lusts to amass money even if it entails danger to life.
“Lust” – physical lust which causes him sometimes to squander his money or dignity.
“Honor” – this refers to arrogance. Also, due to this, he will squander all that he has and endanger himself.”

As I have written recently, humility is a major key to becoming a successful investor. Only a minuscule number of investors can correctly predict the future, and even fewer are able to do it time after time. The key to growing wealth over the long term is to buy good, quality assets and hold them, whether that is property, Exchange Traded Funds (ETFs) or index funds. Virtually all the data points to this. Over the long term if you want to build wealth, check you ego at the door, trust the process, and realize you aren’t going to outperform the market, so don’t try.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.