Behavioral Investment Biases influencing your financial decisions
September 24, 2020 10:29 AM
Investors’ investment decisions are subject to a variety of biases. A bias is considered an irrational belief or assumption that warps the power to recognizing facts and evidence.
The tendency to only invest in familiar investment instruments or sticking to losses within the belief that they’re going to get recovered can harm your budget.
Taking smart and comprehensive decisions involving money can be tricky these days. One of the most important challenges for investors is avoiding their own instinctive behavioral biases. Investors’ investment decisions are subject to a variety of biases. A bias is considered an irrational belief or assumption that warps the power to recognizing facts and evidence.
These biases can lead investors to form illogical or irrational decisions when it involves investments and wealth management as a full. If you don’t have a financial advisor to assist manage your investments, you ought to consider it.
Here are some of the investor biases:
Hindsight bias is also known as “Knew-it-all-along” bias, is based on your past financial decisions. The hindsight bias tends to administer investors a false sense of security therein they overestimate the accuracy of their past predictions. Investors may select investments in keeping with a hunch or gut reaction instead of the facts.
Avoid this bias by specializing in the info, not your predictions. Taking the assistance of a financial advisor can help you to make sound investments.
Once you find more reasons to support your own belief, like consulting Google, you’re using confirmation bias to help your decisions. Investors will often search out information that supports (or confirms) their belief system, and ignore contrary information that threatens the validity of their beliefs.
Avoid this bias by steering off from media influence on your investment decisions. Try to counter the facts and analyzing your decision is a must.
This ‘power-of-the-crowd’ has the power to influence our investment decisions. Herd mentality is a thought process where investors get impacted to follow a trend or a movement for instance; we frequently make our investment decision supported by what the people around us do.
Taking decisions that support what’s making news headlines is not the right choice. Instead, you leave no stone unturned to make your own thoughtful investment decision.
Undoubtedly, chasing trends is the most common investing bias where investors invest by simply following past trends. Investors will analyze trends of just recent times (last year) and make their future investment plans accordingly.
Instead of following the trend, ponder over more about information. Analyze your decision, market condition, company’s growth, and other factors as much as you can.
These biases turn out to be the motives of faulty and wrong decisions. And awareness is the best key to keep yourself safe from the trap. So whilst investing, don’t let your emotion influence you and you make a comprehensive decision based on investment tenure.
By Kapil Rana, Founder, and Chairman, HostBooks Ltd.