Table of Contents
Investing Biases You Should Know About. Instead of letting your feelings cloud your investment strategies, get wise to the three major emotional investing biases that could otherwise influence your decisions. To make sure you don’t let emotion drive investment choices, arm yourself with knowledge. Discover what’s important and how best to approach it!
Investment decisions can be a tricky and emotional business. It’s no wonder that many investors have experienced the pang of regret from time to time. But allowing emotions like fear, greed or anxiety to drive your decision-making is risky.
That’s why so much thought must go into forming an investment plan. A plane rooted more firmly in logical thinking than fleeting surges of emotion!
In this article, we will go over the three most harmful emotional biases. At the end, we’ll give you some advice on how to keep them from affecting your investment decisions. Hopefully helping you to beat external factors and create successful outcomes in the future performance of your investments.
How do you define bias?
Bias is a preconceived opinion based on our personal history and convictions. Fans of sports teams often think the success their team has achieved was due to remarkable performance. But in reality, it could be loyalty driving them to make that assumption.
It’s not uncommon for people to make the same money mistakes when it comes to investing and saving their hard-earned cash. Explore with us some of the most common missteps so that you can learn how to save smarter and make better financial decisions.
What are investing biases?
Investing isn’t always the easiest decision to make, with so many data points and options available. Sadly, it can be all too easy for your emotions or assumptions to distract you from making an informed choice. A slippery slope known as investing biases! Investors tend to fall head on on these biases, no matter how trained they are.
Emotional investing biases #1: Confirmation
We’re all guilty of it: confirmation bias. Our minds seek out only evidence that confirms our existing beliefs. We forget about data which runs contrary to them. It’s an unfortunate reality for sure, but one worth examining if you desire a more open-minded outlook!
As a result, confirmation-biased investors are more likely to focus on evidence that supports their opinion on a certain investment’s potential.
That’s why, this will cause irrational behaviour when it comes to personal investing. So most likely, we will make the poor decisions because of this behavioral bias.
How can you overcome confirmation bias?
First, be aware of confirmation bias and the danger it poses. Recognise that it can cloud your judgement.
Second, seek out information that contradicts your existing beliefs. Don’t forget to consider arguments from the other side as well.
Emotional investing biases #2: Narrative or hindsight bias
People love stories. Narrative bias is so pervasive that it can influence even the most seasoned investors. For example, an investor may be more likely to buy a stock if it has a memorable or inspiring story attached to i.
This works regardless of whether or not the stock is actually worth the investment. This phenomenon has become so common that stocks with strong narratives are now often referred to as story stocks.
How to solve narrative bias?
When you’re looking at where to put your money next, don’t just focus on the story. Pay attention to outside forces that might be able to support or disprove what you’ve heard. Crosscheck the information with other investments you’re thinking about and see if it holds up under pressure.
Emotional investing biases #3: Overconfidence or behavioral biases
The overconfidence bias often makes investors overestimate their abilities and rely too heavily on preconceptions. This can causing them to underestimate the complexity of financial markets. This alluring flaw in judgement can lead to reckless decision-making with far-reaching consequences.
Taking risks in the financial markets can be an incredible pathway to success and growth. However, it’s essential that investors understand their own risk tolerance before taking the plunge. Communicate with a financial advisor if you don’t understand this area. Without a well-thought investing strategy for selling investments your loss aversion will be higher. Consequently missing out on great potential rewards!
How to solve overconfidence bias?
To overcome overconfidence bias, stay grounded with a realistic outlook on the financial market. Brush up on your research skills, analyze data and news thoroughly. Be honest with yourself about what you’re capable of in the market. All this will help ensure that confidence isn’t becoming an obstacle instead of an asset!
If you can handle the three major biases correctly, you’ll be performing better than most (emotional) investors! Take in consideration other influences like familiarity bias, self attribution bias, status quo bias and more. We can add them in another article if necessary. Let us know by writing a request at support@dua.com.
