Investor biases can significantly impact decision-making processes, often leading to deviations from rational investment strategies.
Here are some of the investor biases to avoid:
Confirmation Bias: Investors seek information, data, and news that supports their conceived beliefs while ignoring non-confirming information. This can lead to overconfidence in one’s views and investment decisions.
Endowment Effect: Falsely assigning more value or getting undue comfort from an investment simply because one owns it.
Familiarity Bias: Overweighting investments in industries, countries, or companies one knows well or feels comfortable with. This would include outsized investments only in domestic markets (home bias).
Gambler’s Fallacy: This is believing that after a series of bad outcomes (for example, down days), a good outcome is due.
Herd Behaviour: Rushing to currently hot investments because everyone else is doing so. These FOMO investments can lead to bubbles where asset values get overly inflated before crashing.
Instant Gratification: Taking profits too early as it is psychologically pleasing to do so, even if the investment may still offer attractive return potential.
Loss Aversion: The psychological pain of taking losses can lead to holding onto losing investments, hoping for a recovery despite changes in conditions that may no longer support the original investment thesis.
Mental Accounting / Compartmentalising: Separating pools of money when making investment decisions. This often ignores interconnection between investments, may lead to overlaps, and results in suboptimal financial management.boptimal management of ones finances.
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