Dear Readers,
Investment is an art that every one should understand.
There are few more steps that everyone to understand and to practice it in our continuous journey.
Remember the time in school or at work when you thought you knew the right reply but someone shouted a completely different one? And soon after, when asked for your thoughts/opinions, you switched out your original opinion at the last minute?
This is an example of a psychological bias called conformity bias. But do such biases affect only our everyday life? Nope, they affect our key business and investment decisions too! But before we go into it, we need to answer the main question.
Simply put, it is the tendency to act in an irrational way due to our limited ability to process information objectively.
And this is something we even see in many investment decisions people make daily! Let's find some psychological biases that might be affecting YOUR financial decisions.
FOMO Fury
FOMO makes us do a lot of things, doesn't it? From purchasing that unnecessary technological upgrade to "investing" in meme coins. FOMO makes us behave impulsively and chase trends blindly often at the cost of the facts and fundamentals. This is true for financial decisions too. The best way to avoid this trap is to stick to your investment strategy. If you stumble upon an interesting development in the world of investing, thoroughly research it and only move ahead after verifying it logically keeping your strategy and end goals in mind.
What is the source?
Have you ever been easy on yourself for spending money you received as gifts compared to the money you earned? This is something called Mental Accounting where we start valuing money that we stumble across comparatively easily as less critical.
This practice can often hurt you by locking up money for a future need at the cost of current payouts. For example, it's probably more profitable for you to repay your credit card debt before you put money in a fund for a high ticket purchase. Repaying debt always helps ensure you are paying less to a bank or agency in the form of interest.
3. Leave the loses behind:
We fear losses more than we savour gains. Doing this in financial decisions can become problematic. We end up avoiding opportunities which might seem to possess some risk at face value because we want to avoid even the smallest losses. But as Robert R. Johnson, professor of finance at Creighton University argues, "The biggest financial mistake people make is taking too little risk, not too much risk". If after thorough research, an opportunity fits the sound investment strategy you've developed for yourself, then missing out on it simply due to the risk of a small loss might become a cause for regret in the future.
4. Raise the Anchors
Anchoring biases are difficult to deal with. This happens when you stick to an older piece of information (advice, reference point, price identification etc) as the absolute truth. Thereon, you don't allow any newer information to have any impact on your initial assessment even though they might show that it is no longer relevant. This will lead you to make investment decisions based on historic information alone, ignoring the latest developments. Not only do you risk losing out on great opportunities, but also allow yourself to be stuck in investments way past the right time to exit.
Stay away from herd
Herd mentality, where your decisions are influenced by a herd, your peers or otherwise, is a lethal risk to even the soundest investment plans. Yes, it helps you feel safer in numbers and also avoids FOMO, but the cost is your strategy, that is suited to your goals. That's far too big a trade-off and not worth the risks. Don't be this guy!
Confirmed? Not sure!
We often choose to ignore information that works against our preconceived assumptions while ratifying all information sources we expose ourselves to. This could involve risky information about a desired investment, sketchy background information about a prospective partner or more. ALL INFORMATION MATTERS! Even the ones that don't align with your initial thoughts. Especially those! Remember, this discomfort of letting contradictory information in for assessment will help you avoid the discomfort of poor investments.
Now that you have a good list to compare with, how many biases have you let affect your investments? Don't answer that. Just answer this,
Are you ready to avoid these biases? We sure hope you are!
