If you weren't the lucky jackpot winner this weekend, don't be too upset. Sure, the Powerball lottery reached a whopping $600 million, the second-largest payout in U.S. lottery history. However, the odds of winning this record pot were about 1 in 175 million. With such a slim probability of winning, it's a wonder that anyone played at all. Yet thousands of people stood in line to purchase Powerball tickets ahead of the weekend draw -- buying around 80% of all possible lotto combinations, according to lottery officials.
With a record Powerball weekend now behind us, let's take a closer look at how understanding the lottery and psychology can make you a better investor.
Behavioral Finance 101
When investing in the stock market, the idea is to buy low and sell high. Yet our psychological biases can derail this truism -- making it harder for us to make smart investment decisions. In John R. Nofsinger's book The Psychology of Investing, the author explains how to identify and avoid such mistakes. Listed below are three of the most common psychological factors that can affect our financial decisions.
1. Overconfidence
Investors who are overconfident tend to trade their positions more frequently and thus underperform the market. "Interestingly, people are more overconfident when they feel they have control over the outcome -- even when this is clearly not the case," according to Nofsinger..
Consider this: Psychologists have found that "people who choose their own lottery numbers believe they have a better chance of winning than people who have numbers given to them at random" says Nofsinger. This means that choice can also give investors the illusion of having control, which in turn leads to overconfidence.
This is important to keep in mind, particularly if you're like me and invest using an online stockbroker, such as TD AMERITRADE. AMERITRADE and other discount brokers are great because they save you loads of money on otherwise costly commission and transaction fees. However, Nofsinger argues that it's easy to become overconfident when using online brokers since you're making your own decisions as to which stocks to buy and sell and when to do so.
2. Anchoring
This is a mistake made by both rookie investors and veterans alike. Too often investors "anchor" their perceived value of a stock to its past trading price -- and as a result missing out on future gains because they were waiting to buy in at the arbitrary price that they first anchored to. Fool analyst Dan Caplinger clearly explains the pits of anchoring in his article "The Huge Mistake Apple Investors are Making."
In the article, he cautions investors to "remember that fundamental events rather than arbitrary milestones are responsible for changes in the intrinsic value of the companies you invest in." Ultimately, investors should focus less on daily movements in stock price and more on the underlying business of the company in question.
3. Risk aversion
The rules of traditional finance have long said that people make rational decisions and are risk-averse. However, buying a lottery ticket directly contradicts this assumption. In fact, if you participated in the latest Powerball festivities, then you took on a risk-to-reward ratio of 1 to more than 175 million -- quite the opposite of risk-averse, if you ask me.
The level of risk you can handle often depends on your past investing experiences. Interestingly, studies show that investors are more likely to buy high-risk stocks after cashing out of a successful position. However, this doesn't make your gamble in the riskier stock more likely to earn you a return.
Why psychology matters
Understanding how these factors influence your investing can help you avoid making careless mistakes in the future. Sure, you may not get a sudden influx of millions of dollars like you would by beating the 1 in 175 million Powerball odds. However, your chances of generating market--beating returns for years on end are firmly within your reach. I'll take those odds any day.
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Viktor Troyanov/Getty Images NEW YORK -- The stock market had another turbulent session Friday, capping off one of the more eventful weeks on Wall Street in years. The Dow Jones industrial average soared more than 250 points following strong earnings from Morgan Stanley (MS), General Electric (GE) and Textron (TXT) as well as some encouraging U.S. economic reports. It was the latest big move for a market which, with a few exceptions, has been on a mostly downward track. Stocks have had four weeks of declines, leaving the Standard & Poor's 500 index 6 percent below the record high it set Sept. 18. Investors have been riding wild market swings for much of the week. The Dow Jones industrial average plunged as much as 460 points Wednesday, then had one of its best days of the year on Friday. "We had indiscriminate selling all week, and then today we had indiscriminate buying," said Jack Ablin, chief investment officer at BMO Private Bank in Chicago. Market watchers have warned investors to expect more volatility than they have been used to in recent months, reflecting the heightened concerns about weaker growth in Europe and what it could mean for U.S. corporate profits, as well as plunging oil prices. 
Andrew Burton/Getty Images One thousand days and counting. That's how long it's been since the Standard & Poor's 500 index (^GPSC) suffered a correction. That means the S&P 500 hasn't suffered a 10 percent drop from its recent high level mark since October of 2011. What does that mean for investors? Should they take their profits now, or does this long-running bull market have more room to maneuver? One thousand days is a long time for the bull market to run without interruption, but it's not unprecedented, and it doesn't necessarily mean another correction is right around the corner. The bull market of the 1990s ran for 2,553 days without a correction. "When the market does something unusual it is a good idea to be on your guard," said Hugh Johnson, chairman of the Albany, New York-based money management firm Hugh Johnson Advisors. "For the market to have performed as well as it has without a significant correction is pretty unusual," said Johnson, "but I'm not doing anything about it." Most analysts say the 1,000 day mark isn't significant in their fundamental analysis of the market, but they acknowledge that it is psychologically important for investors. The current streak is double the average span without a 10 percent pullback. About one year after the current bull market began in 2009, there was 16 percent correction in 2010. The most recent correction came in 2011, when the market slumped by a steep 19.9 percent, and there was a close call in 2012 when it fell 9.9 percent. According the Stock Trader's Almanac, the average bull market includes two periods of correction, so the current rally isn't unusual in that regard. Many market pros and anxious investors have been anticipating another correction for quite some time, but the market has continued to plow ahead, setting record after record. So far this year, the S&P 500 has rung up 25 record highs, the latest one coming on Thursday. It went into the 3-day weekend just shy of the unprecedented 2,000 level. In addition, the Dow Jones industrial average (^DJI) topped the 17,000 mark for the first time. That means if you invested in an S&P index fund back when the current bull run began in March of 2009 -- and not traded in and out of that position -- you would have nearly tripled your investment. But Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, says the current bull "gets no respect." The financial media -- in print and on TV -- is filled with gloom and doom forecasts. A recent Wall Street Journal headline proclaimed "Some See Clouds Forming," while some market prognosticators warn that a market collapse is just around the corner. They contend the market cycle has run its course, that the market is way overvalued when you examine corporate profits and other key measures, and that unrest in the Middle East, Ukraine and other hot spots could explode. But most forecasters say that unless there is a major economic crisis (which seems very unlikely after the recent string of upbeat economic data) or a geo-political catastrophe, then the current bull market is likely to continue into next year. Jeffrey Hirsch, editor of the Stock Trader's Almanac, studies historical trends in the market. He expects stocks to trade sideways or retreat a bit during the usual "summer doldrums" of July and August, and then resume their advance later this year and into next year. "I don't see the market rolling over until 2016," said Hirsch, noting that presidential election years "tend to be horrible." Johnson, the veteran money manager who has helped guide investors through many bull and bear market cycles, says he is "on guard" but not worried at this point. He says the market hasn't been overrun by widespread optimism. "You don't run for cover, but you can build some defenses into your portfolio." If you're worried about a downturn, he says you can sell economically sensitive stocks like housing, and buy safer issues like utilities and household product stocks. Many analysts even say a market correction, which is inevitable at some point, is healthy for the long term bull to continue. It gets stocks from levels that are seen as slightly overvalued back into a more fairly priced range. And as Johnson notes, that would provide for "more upside potential with better buying opportunities."
