Biases

 

We believe that we are rational decision-makers but little do we realize that it is also influenced by our biases. The human brain quickly categorizes new information with the experiences of the past, Once grouped it responds to the same ways it does with other things in the category-leading to bias. finance unlike physical sciences it is affected by one's behavior and gives different results to different people according to their temperament be it wealth creation or financial debacles. To overcome financial debacles we should see things as they are without our biased lens. To let go of our biases we should constantly challenge our beliefs by engaging in debates and discussions who have a contrarian view( just to hear the other side) but confirm with the facts available. Here is the list of biases researchers have warned that we may fall for.

Anchoring Bias: Over-reliant on the first piece of information.

Availability Bias: Overestimate the importance of the information available to them.

Bandwagon Effect: Tendency of investing just because others are doing regardless of their own beliefs 

Blindspot Bias: Failing to recognize one's own bias 

Choice supportive Bias: Chose something and be positive about it despite its flaws 

Clustering illusion: See patterns in some random events while none exists 

Confirmation Bias: Selectively chose information that confirms our preconceived notions 

Conservatism Bias: People favoring prior information over newly emerged evidence

Information Bias: Seek more information when it does not affect the result. we believe that more information is better it is. failing to understand that accurate predictions can be made even with less information.

Ostrich Effect: Ignoring dangerous or negative information. Research suggests investors check the value of their assets significantly less during bad markets.

Outcome Bias: Judging a decision based on the outcome rather than exactly how that decision was made.

Overconfidence Bias: Too confident of our abilities experts are more prone to this than ordinary people because they are convinced they are right. Franklin Templeton 

Placebo effect: The belief that it has a certain effect causes it to have that effect

Pro innovation Bias: Overvalue innovation but undervalue its limitations

Recency Bias: Tendency to weigh the latest information more heavily than older data.

Salience Bias: Focus on the most easily recognizable feature of a person or concept 

Selective perception: Allowing our expectations to influence how we perceive the world 

Stereotyping: expecting a certain group to have certain qualities without having real information about the person.

Survivorship Bias: An error that comes while focusing only on surviving examples 

Zero risk Bias: Elimination of risk completely and no chances of harm being caused as we love certainty even if it's counterproductive. 

Self Attribution Bias: Investors attribute successful investments due to their own actions while bad outcomes to external factors.

Disposition Effect: Investors hesitate to realize their losses and hold stocks for too long hoping to recover this tendency leads to sell their winning stocks but holding losing positions. expressed  succinctly by peter lynch in his book one up wall street  “Selling your winners and holding onto losers is like cutting the flowers and watering the weeds.” 

Familiarity Bias: invest in stocks or business only familiar to them despite the evidence that there are other profitable options.

References : 

https://www.americanbar.org/content/dam/aba/administrative/trust_accounts/20-cognitive-biases-that-screw-up-your-decisions.pdf