7 Common Behavioral Biases of Stock Investors

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Behavioral biases can impede returns on your stock investments. Do you exhibit any these latent biases?

Individuals are often creatures of habit (i.e. lazy) or may let emotions affect their decision making. Below are seven of the most common behavioral bias, gleaned from personal experiences, general observations of fellow investors and stock forums.


01Anchoring Bias


 

02Loss Aversion Bias


 

03Confirmation Bias


 

04Belief Perseverance Bias


 

05Naïve Diversification


 

06Availability Bias


 

07Hindsight Bias


 

Mitigating Effects of Behavioral Biases and Conclusion

Of course, the above is not an exhaustive list of behavioral biases, but should cover more than 90% of investment decisions faced by most private investors.

Behavioral biases are inherently difficult to address, as could be expected when it comes to critiquing your own performance. This is why sometimes even the most successful fund managers prefer to let a third party manage their personal portfolios.

Besides removing oneself from decision making in investments, one of the best ways to conduct self-discovery of your biases is still to regularly ask if you exhibit any of the above traits when evaluating an investment decision. In other words, would you have made a different investment decision if the portfolio concerned belongs to someone else?

If this is not possible, it might just be best to seek a second opinion from time to time from an objective person you can trust. After all, acknowledging that you suffer from behavioral bias (as we all do), is already winning half the battle.

 

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Last Updated ( Monday, 21 July 2014 04:31 )