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There is no shortage of cognitive biases out there that can trip
up our brains.
By the last count, Visual
Capitalist's Jeff Desjardins notes there are 188 types of
these fallible mental shortcuts in existence, and they constantly
impede our ability to make the best decisions about our careers, our
relationships, and for building wealth over time.
BIASES THAT PLAGUE INVESTORS
In today’s infographic from StocksToTrade, we dive
deeper into five of these cognitive biases – specifically the ones that
really seem to throw investors and traders for a loop.
Next time you are about to make a major investing decision, make
sure you double-check this list!
The moves that may seem instinctual for the average investor may actually
be pre-loaded with cognitive biases.
These problems can even plague the most prominent investors in the world –
just look at JPMorgan’s Jamie
Dimon!
BIASES TO AVOID
Here are descriptions and examples of the five cognitive biases that can
impact investors the most:
Anchoring Bias
The first piece of information you see or hear often ends up being an
“anchor” for others that follow.
As an example, if you heard that a new stock was trading at $5.00 – that
is the piece of information you may reference whenever thinking about that
stock in the future. To avoid this mental mistake: analyze historical data,
but don’t hold historical conclusions.
Recency Bias
Recency bias is a tendency to overvalue the latest information available.
If you heard that a CEO is resigning from a company you own shares of,
your impulse may be to overvalue this recent news and sell the stock.
However, you should be careful, and instead focus on long-term trends and
experience to come up with a more measured course of action.
Loss Aversion Bias
No one wants to lose money, but small losses happen all the time even for the
best investors – especially on paper.
Loss aversion bias is a tendency to feel the effects of these losses more
than wins of equal magnitude, and it can often result in a sub-optimal shift
in investing strategy. Investors that are focused only on avoiding losses
will miss out on big opportunities for gains.
Confirmation Bias
Taking in information only that confirms your beliefs can be disastrous. It’s
tempting, because it is satisfying to see your previous conviction in a
positive light – however, it also makes it possible to miss important
findings that may help to change your conviction.
Bandwagon Bias
No one wants to get left out, but being the last one to pile onto an
opportunity can also be cataclysmic. If you’re going to be a bandwagon
jumper, make sure you’re doing it for the right reasons.
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