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Market psychology: Smart people make dumb mistakes

With Wall Street enduring another day of wild swings Tuesday, one psychologist cautioned that people need to take emotions out of decision making during turbulent times.

"Lots of smart people make dumb mistakes with their money, especially during times like this. They fall into certain mental traps," Jeffrey Nevid, director of clinical psychology at St. John's University, said in an interview with CNBC's "Closing Bell."

Those traps are what he calls cognitive biases, including the inertia bias, which is the tendency to think that if something is going up, it is going to continue to go up and if it is going to go down, it will continue to go down.

Another trap people fall into is a hindsight bias, or what Nevid calls "woulda, shoulda, coulda syndrome."

"That's a mistake that people make that can lead them to become depressed or anxious or even panic," he said.

The recent market conditions are certainly taking a toll on investors, said Nevid, noting that people peg their self-worth to what the market is doing, which can be very dangerous.

Both the Dow Jones industrial average and S&P 500 closed lower Tuesday after rallying about 3 percent earlier in the day. It was their biggest reversal to the downside since October 2008. Monday's stock action saw stocks plummet more than 3.5 percent.

—CNBC's Robert Hum and Laura Petti contributed to this report.