Biases That May Affect Investors

It’s quite unfortunate that emotions may cloud our financial judgment. Financial problems could wreack havoc on our overall portfolio. In reality, behavior is a significant risk factor that may affect investors, There are cognitive and emotional biases that may result in less than ideal decision making processes. Overconfidence is a prevalent emotional bias and it can affect everyone, not just investors. Many people think that they can beat the stock market by choosing a few very prospective stocks. It’s very possible for them to gain ideas from different sources. When we overestimate our own abilities, it’s likely that we underestimate risks. Investors should have sophisticated data and research capability to achieve their goals. They need to perform the necessary due diligence, so investment portfolio can be maintained. If we are being overconfident, it’s likely that we will leave our eggs only in one or two baskets. Each basket may dangerously be related to one another. So if one basket is affected, another could be affected as well. It’s likely that people simply overemphasize their overall personal contributions. People could also be affected by the familiarity bias. People tend to invest money on areas that they know best. It may be a good thing, but it’s important that we have diversified portfolio. A portfolio without enough diversification could result in higher risks.

Some investors may also have specific aversions. Due to loss aversion bias, investors may hold losing investment for too long. This could happen when investors make speculative trades based on inaccurate projections. Due to their high expectation, investors may hold an investment for too long. It is important for investors to know about sunk costs. In general sunk costs are any expense that has been incurred. It’s important for us to incorporate such factor in our future actions. Things could go awry if we have inability to come to terms with factors that are related to our investments. When we have investment failure, we will lose money and we simply hope to recoup our losses. Inaccurate projections may cause people to easily miss their opportunities. We should also know about anchoring, In general, anchoring bias could cause investors to feel reluctant to sell investment platforms that are at a loss. This could happen when investors have become very eager with specific investment platform that pulling their money out of it is considered as unacceptble. It is important for investors not to follow the herd. When the financial media is bullish, it is more likely for investors to put extra money in more promising stocks. They could do this even if the prices are soaring high. This could happen when the media appears to be pessimistic. Investors may be reluctant to purchase stocks although the market is showing signs of recovery. As a result, investors lose the opportunities of purchasing stocks at heavily discounted prices. In this case, it is important for investors to know more about their own intuition. They need to trust themselves, instead of trusting others. Intuition and experience can be shaped through mock purchases and simulations of stock investments.