A heads-up to anyone with a 401(k): With the stock market near record highs, the biggest threat to your hardearned retirement savings could be you. Your emotions, biases and other mental miscues can lead to psychological traps that cause you to make bad investment decisions.

The emerging field of behavioral finance, which looks at the relationship between investor psychology and the money-related moves people make, chronicles many human traits that can cause errors in decision-making.

“To keep it simple, behavioral finance is the reality of humans being human and making mistakes,” says Woody Dorsey, president of Market Semiotics, a Vermont research firm that studies and diagnoses the habitual cognitive errors investors make.


Here are four ways investors’ flawed thinking can lead to blunders and how they can avoid those mistakes.

■ Avoid overconfidence: It’s easy for investors to credit their savvy stock picking for big gains in their portfolios, rather than acknowledge the long climb in stock prices that has pushed the Standard & Poor’s 500 index up 330 percent since March 2009.

Such overconfidence occurs when people think they are better informed and better investors than they are.

Michael Pompian, CEO of Sunpointe Investments in St. Louis and author of “Behavioral Finance and Wealth Management,” says investors who think too highly of their own ability tend to take “foolish risks,” like buying hot stocks without doing proper research, trading too frequently and straying from their financial plans.

Tip: Only 36 percent of active U.S. stock pickers at mutual funds posted better returns than market benchmarks they’re compared to in the year ending in June.

■ Not seeking alternative opinions: Known as “confirmation bias,” investors can run into trouble when they only seek out information that fits with their bullish or bearish outlook for the stock market.

Tip: If you’re bullish on the market, focus on news articles and Wall Street pundits who warn of a coming calamity. Analyze whether the downbeat views have validity.

■ Betting the trend will continue: “Recency bias” is when investors believe the current trend will continue. That means investors today could err by betting on an ongoing rise in stock prices in which the market rarely has violent swings.

Movements in the stock market are hard to predict. So a wager on things staying the same for too long can lead to complacency and set up investors for disappointment if the market tanks, turns turbulent or when a hot sliver of it, such as top-performing tech stocks, suddenly cools.

Tip: Think back to other market peaks that ended badly, such as the 2000 internet bust or the meltdown in 2008 and 2009. It’s a good reminder bull markets are followed by bears.

■ Selling winners too early: The so-called "disposition effect,” or tendency for investors to sell their winning stocks and hang on to losers, can also prove harmful. Even though this bull seems to have entered its later innings, the economy is still growing at its best pace in four years, and the consumer is in good shape due to low unemployment and rising wages.

"Some investors are selling their stocks because they fear a pending bear market,” Pompian says. “The flaw in this thinking is that the economy is strong and there are few signs that a recession is imminent.”

Tip: If you own a top-performing stock, keep a close check on its business health, and if earnings, sales and market share remain strong, there may be a good case to keep it.