Cognitive Biases
What is Cognitive Bias?
Cognitive biases are systematic ways of thinking that can lead to errors in reasoning, judgment, and decision-making. Cognitive biases can be considered obstacles in investment because they can lead to biased thinking and non-rational decision-making, resulting in poor investment choices.
Common Cognitive Biases
Common cognitive biases that can influence investment decisions:
- Anchoring Bias: Making investment decisions based on only one factor or piece of information rather than considering the whole picture. For example- invest in a stock because it has historically performed well, it will perform well in the future.
- Confirmation Bias: Seeking out information that confirms your existing beliefs or biases rather than objectively analyzing all available information. For example- only read news articles or analyst reports supporting their beliefs about a particular stock.
- Herd Mentality Bias: Following the decision of the crowd or popular opinion rather than relying on personal analysis or research. For example- buying popular stocks
- Loss Aversion: Avoid losses even at low-risk investment profiles due to the fear of losing money, rather than considering the potential for long-term gains. For example- investing only in bonds, without considering other asset classes.
- Status-quo Bias: Assuming that the current market scenario will continue to sustain and avoid other upcoming changes rather than adapting to new information or circumstances. For example- I do not invest in technology because I always invest in energy stocks.
- Overconfidence Bias: Overestimating one’s ability to make accurate judgments or predictions rather than acknowledging the limitations of one’s own knowledge or expertise. For example – predict market trends or invest heavily in one stock.
- Information Bias: Relying too heavily on external sources of information such as news, tips, discussions, or social media rather than conducting thorough research and analysis. For example- decisions solely based on social media and youtube
What is Cognitive Bias?
Cognitive biases are systematic ways of thinking that can lead to errors in reasoning, judgment, and decision-making. Cognitive biases can be considered obstacles in investment because they can lead to biased thinking and non-rational decision-making, resulting in poor investment choices.
Common Cognitive Biases
Common cognitive biases that can influence investment decisions:
- Anchoring Bias: Making investment decisions based on only one factor or piece of information rather than considering the whole picture. For example- invest in a stock because it has historically performed well, it will perform well in the future.
- Confirmation Bias: Seeking out information that confirms your existing beliefs or biases rather than objectively analyzing all available information. For example- only read news articles or analyst reports supporting their beliefs about a particular stock.
- Herd Mentality Bias: Following the decision of the crowd or popular opinion rather than relying on personal analysis or research. For example- buying popular stocks
- Loss Aversion: Avoid losses even at low-risk investment profiles due to the fear of losing money, rather than considering the potential for long-term gains. For example- investing only in bonds, without considering other asset classes.
- Status-quo Bias: Assuming that the current market scenario will continue to sustain and avoid other upcoming changes rather than adapting to new information or circumstances. For example- I do not invest in technology because I always invest in energy stocks.
- Overconfidence Bias: Overestimating one’s ability to make accurate judgments or predictions rather than acknowledging the limitations of one’s own knowledge or expertise. For example – predict market trends or invest heavily in one stock.
- Information Bias: Relying too heavily on external sources of information such as news, tips, discussions, or social media rather than conducting thorough research and analysis. For example- decisions solely based on social media and youtube