s the saying goes, “People don’t know what they don’t know.” This leads us to the final investor behavioral bias that sometimes affects investors: the Bias Blind Spot, the inability to recognize our own tendency towards a particular behavioral bias or biases.
Does recent history make a difference in financial investment? Stock market prognosticators carry a track record of projecting ongoing investment trends based solely on most recent stock activity. A rising stock in recent weeks is expected to continue its upward trajectory into the future since there seems to be no indication otherwise. This can be a dangerous assumption, one which investors refer to as Recency Bias.
Each of us craves a good story. Imagine you’re at a dinner party and your friend shares this story, “I invested $72,591 in a stock that tripled in value within a week. I sold the stock yesterday and it’s paying for all three of our kids to attend college.” It’s an inspiring story and it may even be enough for you to go out and invest tens of thousands of dollars in a single stock option in search of that same windfall. This investor behavioral bias is simply called “Preferring Stories over Data”.
“Birds of a feather flock together… and so do investors.” Bernie Madoff masterminded one of the greatest affinity frauds in history. Madoff fleeced a large segment of the New York and Palm Beach Jewish communities of an estimated $20 billion by preying on a prominent investor behavioral bias known as herding. (Wall Street Journal)
Is it easier to make a decision when you have three options or ten options? Whether it’s a restaurant menu, song list, or a full wardrobe, the luxury of wider varieties can often lead to Choice Paralysis. While choosing from more options can often lead to making better decisions, it can also throw our investing momentum into neutral.
On a scale of one to ten, how confident are in you in your ability to plan your financial future? It may be better to ask yourself, “How well do I accurately plan my future?”
Why do you succeed? Why do you fail? How you answer these two questions may reveal your natural inclination towards or rejection of a self-serving bias.
The idea of guaranteed loss at some point over the life of an investment can lead to loss aversion among investors.
