What recency bias does — overweighting recent events in investment decisions

What anchoring does in investing — the purchase price biases your sell decision

Anchoring bias causes investors to base sell decisions on initial purchase price rather than current market value

What the disposition effect causes — investors sell winners too early and hold losers too long

The disposition effect leads to premature selling of profitable investments and delayed selling of underperforming ones

How does the concept of leverage in financial markets influence the risk-return tradeoff for investors?

Leverage amplifies potential returns but also increases risk exposure in financial markets

What Modern Portfolio Theory says — diversification reduces risk without reducing expected return

MPT asserts that diversification lowers unsystematic risk while maintaining expected return

What Long-Term Capital Management's failure showed — even Nobel Prize-winning models can blow up

Nobel models can't always predict extreme market events

What Buffett means by 'Only when the tide goes out do you discover who's been swimming naked'

Exposes investors' lack of prudent risk management