Biases to Look Out for When Investing

I find it interesting how we can be affected by own personal biases during investing. Most of these biases have been observed in studies, yet most of us are still not aware that we suffer from them and believe that we are objective in our view and analysis of our investment, which can be a very costly mistake.

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Anchoring

As I’ve mentioned in Organizing Thoughts, we have a tendency to reach a conclusion first before we carefully analyse the facts. The first source of information that we come across usually acts as an anchor, making it difficult for new information to come and change our frame of mind or perspective. A negative experience like going through the 2008 financial crisis can also serve as an anchor, affecting their future decisions

Confirmation Bias

With our perspective and frame of mind anchored, we have a tendency to search for information that conforms to our view and may ignore ones that go against our view, losing the opportunity to spot valuable insights before investing. Our "in-depth analysis" will only further prove our own foregone conclusion.

Recency Bias

We tend to focus a lot more on short-term happenings and extrapolate them into the future. This is what leads us to sell when share are dropping and buying them as they go up as we expect this trend to continue on almost indefinitely into the future

I think remembering that past performance is not a guaranty for future performance, which  is particularly true when the past performance is only a short-term one.

Optimism bias

We are usually overly optimistic about not only about the prospects of our investments, but also about our own abilities. Some studies I’ve been mentioned online (no specific reference) show that when people are to rate their own abilities or skill level, majority of people would rate themselves above average and are only 80% sure when they are “99% sure”. Around 85-90% of people also think that they will have a better and less painful future than the average person.

Our blind spot for biases

And the last one which basically prevents us from seeing our own biases. We may think that we are looking at our investments objectively, but in reality, there are many biases that shape the way we view them.

Summary

While we may think that we are objective when looking at our investments, we are influenced by many biases that we already have. Hope to be able to reduce the effect of these biases now that we know them and try to compensate or avoid them altogether.

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