Table of Contents
Investing Biases You Should Know About. Which are the 3 emotional investing biases you should know about? Your investment decisions can be swayed by your emotions. But how can you prevent that? Here’s what you should know.
Many investors have admitted to feeling regretful about past investment decisions. Emotions should never be a factor when investing. Unfortunately, bad thinking patterns often cloud judgement and lead to bad decision-making. 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.
How do you define bias?
A bias is an assumption that we form based on our past experiences or beliefs. Sports fans, for example, may say their teams are the results of great plays simply because they’re rooting for them.
Many individuals have the same biases when it comes to investing and saving. We’ll look at the most popular ones and how to avoid them so you can make informed financial decisions.
What are investing biases?
Investing can be overwhelming, with all of the data and investment options out there. It’s easy to make mistakes or overlook important factors when you’re making your decision. Investing biases are the ones we make based on our assumptions and emotions.
Emotional investing biases #1: Confirmation
Confirmation bias, as the saying goes, is difficult to overcome. Confirmation bias causes us to seek out information that confirms our existing views. In contrast, it disregards data that contradicts them. 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 investing. So most likely, we will make the wrong investment decisions.
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
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 it, 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
Overconfidence bias is a flaw in judgement that causes people to overestimate their abilities. It pushes investors to rely only on their preconceptions. As a result, they tend to underestimate the financial markets and their understanding of them. That’s why, unless you know your risk tolerance level, this might lead to poor investment decisions and heartaches.
How to solve overconfidence bias?
You may easily avoid overconfidence bias by keeping a realistic perspective on the market and your investing capabilities. Make sure to research news, charts, and other resources to help you learn more. At the same time, be upfront with yourself about your investing talents.
If you can handle the three major biases correctly, you’ll be performing better than most (emotional) investors!