Biases that influence your investment decisions
Most people who invest in the stock market don't reach their goals. The top 1% of investors can double or even triple their returns from the market.
Reason: how investors think
How this article will help you avoid these biases:
Awareness - Knowing what biases affect your decision making is half the battle.
Routine: I've made a list of biases that affect your analysis and biases that make you overestimate investments.
Cognitive frivolity
All of the following biases work so well because of the way people's minds work. Cognitive light-mindedness is a state of mind that is wanted and linked to good feelings. This is the main reason why people make bad choices.
Halo effect
It is much easier to think in black-and-white stereotypes than in gray ones. The halo effect explains why we like or dislike everything about someone or something that is connected to them. It's harder than we think to agree with some ideas and disagree with others.
What You See Is All There Is
All there is is what you see. You can't think about something you don't know. In a strange way, self-righteousness goes up when you only listen to one point of view. Again, we choose certainty over uncertainty.
Anchoring
Our decisions are mostly based on the first information we get. If you know that Apple shares are worth $150, they will look like a good deal at $120. Not even knowing if $150 is close to what something is really worth.
Regression (Correction)
We love to find links between things that don't have any. Regression to the mean can be one of the most important, but often overlooked, factors. Due to price balancing, everything tends to be worth about the same.
Perceptual bias
We think that events were easier to predict than they really were because of what we already thought. In hindsight, it's easy to make up connections between things. The truth, though, is more complicated. There are a lot of good ways to guess what will happen.
The Fallacy of Mastery
Both buyers and sellers know the same things. They buy and sell stocks based on what they think. People don't believe that short-term stock picking is good luck because it's done by smart people.
Loss aversion
Loss aversion makes us ignore even gambling that has a good chance of going our way. A loss has twice the weight of an equal gain.
Dedication bias
Commitment is linked to good traits like consistency and intelligence. In this way, we don't break our promises. Investment decisions must be talked about in public. The more you talk, the more you can persuade yourself of something.
Leaning toward recent events
We tend to give too much weight to things that have happened recently. Because of this effect, the market tends to move in a certain direction most of the time. When things are going well, we think they will only get better. We think that when things go wrong, they will only get worse.
Effect of ownership
When we own something, we value it more. This is one way we can explain why we did what we did. Before we buy a stock, we look at it critically and try to find any risks. After making a purchase, we think about the good things about it to justify our choice.
This is called confirmation bias
We choose what to believe based on what we already know. What doesn't fit with our ideas is either ignored or called a lie.
Thinking based on odds
We often think based on how we feel. But in our lives, everything is a game of chances. Using reasoning to think about the most likely outcomes will help us make better decisions.
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