Your Biases Are Stopping You From Making Good Investment Decisions

And here’s how you can overcome it.

Human beings are emotional creatures and we all have our own biases, that were formed by our early experiences, learning and so on. In this article, we will talk about those biases, which researchers believe to be the most common cognitive or psychological investing biases, and also how you can avoid them.

Confirmation Bias

Confirmation bias happens when investors embrace information that confirms their beliefs or viewpoints and ignores or reject information that challenges that belief. For example, if you are expecting the market to rally in the next month, you would pick out bits of data that confirms your belief. However, if you see data that says the opposite, you would completely ignore that data because it casts doubt on your belief.

How to overcome it?

Always try to see the other side of your viewpoint. When you have a particular set of data that confirms your belief, try to look for instances to prove that you are wrong. This will help you make the best investment decisions because you’re taking a neutral stance and not inclining towards your beliefs.

Familiarity Bias

This bias is what makes investors prefer “familiar” investments of their own country, region, state or company. For example, let’s say you like to invest in only one company’s stock because you worked there earlier or maybe because it has given you better returns in the past. Since you’re “familiar” with this stock, you wouldn’t take the risk of buying any other stock or investing in a mutual fund. This is harmful because of the lack of diversification in your portfolio will hinder you from getting more gains.

How to overcome it?

When you’re creating an investment portfolio, always remember that diversification is what helps you manage your risk and earn more gains. Exposing yourself to only one stock carries a huge risk because your entire portfolio will decline when that one stock’s value goes down. Try including a couple of mutual funds in your portfolio as it will help you earn better returns while minimising your risk.

Bandwagon Effect (or Groupthink)

This is a psychological phenomenon whereby investors do something mostly because other investors are doing it, regardless of their own beliefs, which they may ignore or override. For example, let’s say that everyone around you has invested in a cryptocurrency or a stock from a particular company because they believe that it will rally in the future. Since you don’t want to be excluded from the group, you jump on the bandwagon without giving much thought about it.

How to overcome it?

If you want to be a successful investor, you should be able to analyse and think independently. Even though the desire to ‘fit in’ is not that easy to ignore, you always have to understand the negative consequences that comes with it and the burst of bitcoin bubble is the best example for it. So, before following the crowd, sit down and think because if you face any losses, “the crowd” will not take responsibility for it.

In conclusion, we understand that taking informed decisions might look like a difficult process but we designed our app to help investors like you. So, if you want to choose the mutual fund that is right for you and your investment goals, head to our Invest section where we offer elaborate information on every fund in easy to understand charts and tables. Download our app, moneyguru from the Google Play or App Store today!

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