By Vivek Banka
Most retail investors fail to make good returns on their investments due to emotional or cognitive biases. When we buy a stock at a certain price, our mind gets anchored to that price and if the price goes up, we find it difficult to buy more of the stock at higher prices despite the company having a great future prospect.
Conversely when the price falls, we tend to average the stock and /or not sell even if the fundamentals have crashed and believe we are getting it at a big discount. Anchoring bias is one of the biggest reasons for people losing money and failing to miss good opportunities.
Recency bias
Another bias is the weightage we give to recent information while taking an investment decision. The prime example is the Covid pandemic, when during March 2020 everyone felt it was the end of the world and sold stocks only to witness one of the best rallies equities have ever seen. We tend to ignore the long-term probabilities and focus only on the information that we have received in the very immediate past.
Survivorship bias
When we look fin-influencers and our friends and family shouting from the rooftops about some of their investment successes we forget that they might just be proclaiming their winners and the ones that have survived. We miss out people who would have made severe losses and also their own investments which might have been in deep red and focus on only the ones that “survived” or did well. This leads us into a state of euphoria or fear of missing out, as we believe that these individuals’ successes are the norm and we try to replicate that, eventually digging our own grave.
Sunk cost fallacy
When we invest money in a stock, we want it to be the right decision. In this pursuit of success, we try to infuse more funds into a bad investment in the hope that that bad investment will turn out to be good. Many a time, exiting that investment or strategy would be a better bet. However, our emotional bias stops us from taking a rational decision.
These are but just a few of the biases. However, a great starting point which if conquered will ensure better investment outcomes. Investing remains more of an emotional science and hence the difference between the winners
and losers boils down to who can control their short-term emotional pressures better.
The writer is co-founder, Goalteller.
