Question

In: Finance

Which BEHAVIORAL BIASES most often affect our investment decisions and how do they do so? What...

Which BEHAVIORAL BIASES most often affect our investment decisions and how do they do so? What are some premeditated tools / systems which one could use to avoid making these errors?

Solutions

Expert Solution

Overconfidence, Reducing Regrets, Limited Attention Span, Chasing Trends, Past Experiences and many more affect the Investment Decesions.

How to avoid:-

Manage emotions. Studies show that investors feel greater pain from investment losses than satisfaction from investment gains.

Seek contrary opinions. Confirmation bias is the tendency to seek opinions validating an individual's point of view.

Be a "renter" not an owner. Investors often develop an unhealthy attachment to a stock. Sometimes the attachment is linked to a personal connection to the company; in other cases, investors fail to understand that a "great" company may not always be a "great" stock.

Don't chase yesterday's winners. Investors typically ignore legal disclosures that past performance is not a guarantee of future performance.

Beware of crowded trades. Success breeds imitation in the investment industry, and a herd of imitators can end a successful investment strategy.

Pay more attention to detailed analysis than to stories. Humans like stories, and often create a narrative that supports their investment decisions. Midstream energy MLPs such as oil and gas pipelines became popular investments a few years ago, offering attractive historical returns, predictable cash flows, and a degree of inflation protection.


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