Many of our life decisions are influenced by our emotions, whether it's for vocation, acquiring products and services, or anything else. We may come to regret our decisions because we allow our behavioural biases to prevent us from evaluating other factors. It may also happen when we make investment decisions. As a result, it is critical to understand behavioural biases and avoid them while making financial decisions.
Behavioural biases are a component of investing that affect many of the decisions made by investors. Behavioural Biases, which are pre-existing preconceptions that are usually incorrect, are unconsciously impacting investing decisions. So, in this blog, we will guide you through the common behavioural biases used by investors.
Overconfidence Bias
This is the most prevalent bias noticed among investors, who are generally seasoned experts with a track record of success. Overconfidence can manifest as overconfidence in one's judgement or overconfidence in the facts at hand.
In the first scenario, investors usually make risky bets, focus too much on a particular stock or trend, and, as a result, trade excessively or inadequately. In the latter case, the investor naively accepts information about any investment strategy that looks particularly appealing.
Holding-On Bias
One of the riskiest biases in investment behaviour is clinging to prejudice. How often have you stuck with an investment despite its bad performance since you had such faith in it? As a consequence, even if this investment has done nothing but lowers the value of your whole portfolio, you clung onto it longer than you should have.
"Maintaining prejudicial beliefs" alludes to the challenge of selling a bad investment. In this instance, the investor is either overconfident or emotionally committed to a particular item, making it difficult for them to see the harm they are causing. They decide to disregard it even if they do.
Convergence Bias
Investors are vulnerable to confirmation bias when they unintentionally create arguments or seek data that supports their already-formed assumptions about a potential investment. Therefore, in these situations, investors frequently shut themselves up to alternative thoughts and resist competing perspectives.
For instance, if you adopt a dogmatic mindset and believe a certain company or sector holds great promise, you can overlook the risks involved in investing in that sector or refuse to accept that threats even exist. So, there may be an overconfidence bias as a result.
Trend-Pursuing Bias
According to studies, most investors base their decisions on the previous year's outcomes. Performance in the past is no longer a reliable predictor of future performance. On the other hand, investors do not apply this to their investments.
In reality, most experienced investors rely on their previous performance-based investing decisions. Similarly, many investors base their investing decisions purely on past performance, despite the fact that past success does not guarantee future outcomes. If any factor is overlooked by investors, this proclivity may result in a poor investment decision.
Final Words
Behavioural biases, which at first glance might not seem like a huge issue, can seriously impede the success of an investment. You might lose all your money with a single poor investment. To make a sensible investment choice, be aware of the above behavioural biases and learn how to avoid them.
