- Date : 19/11/2022
- Read: 3 mins
Behavioural biases are the psychological factors that influence investors' decisions to invest in financial markets or complex financial situations. These biases influence investors with unconscious beliefs.
Behavioural biases could influence the actions and decisions taken by individuals in the financial market. Read more to be able to influence or adjust to these biases by being conscious of them! The awareness of these behavioural biases could probably enhance economic outcomes by investing in the financial markets.
Also Read: Follow these 6 tips to become a better investor!
What are the most common Behavioural biases in investing?
Behavioural biases can occur without the knowledge of the investor. Therefore, it is crucial for investors to know about these biases to avoid them while trading. The most common behavioural biases in investing are:
- Familiarity
Investors have a familiarity bias that causes them to favour investing in asset classes about which they are knowledgeable or about which they have access to more relevant details.
For instance, one might invest just in the stocks of real estate corporations or select the stocks of a specific company. It can contribute to a restricted portfolio that doesn't fit one's risk tolerance and investing goals.
- Recency
Recency bias is selecting an investment option which is trending or popular. Investors easily get trapped in the investment suggestions provided by news channels, social media, family, and friends.
In order to avoid such recency bias, one must do some basic research before investing and understand their financial situation to make rational decisions.
- Herd mentality
Investors that follow the majority rather than acting independently based on financial advice reflect herd behaviour. Because that feels safer, individuals are inclined to follow the herd. Additionally, there is the "fear of losing out".
It is unsettling to watch when one's colleagues benefit from a particular investment. Herd behaviour can backfire and result in enormous bubbles, such as the Dot-Com boom and the Dutch tulip market bubble.
- Loss aversion
Loss aversion is the urge to prefer minimizing losses to gain benefits. Investors avoid tiny risks due to loss aversion, despite the fact that they are presumably beneficial. Loss aversion is the reason why people decide to save rather than invest, even after knowing that it will be profitable.
One should make an investment strategy and adhere to it to overcome this. Investors should also try and select assets that intend to perform well, such as an index fund that monitors the S&P 500.
- Overconfidence
The overconfidence bias is the temptation to assume we are superior to one is. The overconfidence bias is dangerous because it might encourage an investor to exaggerate their skills and knowledge, which could result in impulsive or destructive actions.
It is advisable for such investors to concentrate on passive investing rather than seeking to time the market accurately.
Also Read: Ideal Investment tips for lazy Investors: The 2022 Edition
Final words
Investors investing in the financial market should be aware of these behavioural biases that they do unconsciously. These behavioural biases influence one's decisions through various factors and emotions, risking their investments.
Behavioural biases could influence the actions and decisions taken by individuals in the financial market. Read more to be able to influence or adjust to these biases by being conscious of them! The awareness of these behavioural biases could probably enhance economic outcomes by investing in the financial markets.
Also Read: Follow these 6 tips to become a better investor!
What are the most common Behavioural biases in investing?
Behavioural biases can occur without the knowledge of the investor. Therefore, it is crucial for investors to know about these biases to avoid them while trading. The most common behavioural biases in investing are:
- Familiarity
Investors have a familiarity bias that causes them to favour investing in asset classes about which they are knowledgeable or about which they have access to more relevant details.
For instance, one might invest just in the stocks of real estate corporations or select the stocks of a specific company. It can contribute to a restricted portfolio that doesn't fit one's risk tolerance and investing goals.
- Recency
Recency bias is selecting an investment option which is trending or popular. Investors easily get trapped in the investment suggestions provided by news channels, social media, family, and friends.
In order to avoid such recency bias, one must do some basic research before investing and understand their financial situation to make rational decisions.
- Herd mentality
Investors that follow the majority rather than acting independently based on financial advice reflect herd behaviour. Because that feels safer, individuals are inclined to follow the herd. Additionally, there is the "fear of losing out".
It is unsettling to watch when one's colleagues benefit from a particular investment. Herd behaviour can backfire and result in enormous bubbles, such as the Dot-Com boom and the Dutch tulip market bubble.
- Loss aversion
Loss aversion is the urge to prefer minimizing losses to gain benefits. Investors avoid tiny risks due to loss aversion, despite the fact that they are presumably beneficial. Loss aversion is the reason why people decide to save rather than invest, even after knowing that it will be profitable.
One should make an investment strategy and adhere to it to overcome this. Investors should also try and select assets that intend to perform well, such as an index fund that monitors the S&P 500.
- Overconfidence
The overconfidence bias is the temptation to assume we are superior to one is. The overconfidence bias is dangerous because it might encourage an investor to exaggerate their skills and knowledge, which could result in impulsive or destructive actions.
It is advisable for such investors to concentrate on passive investing rather than seeking to time the market accurately.
Also Read: Ideal Investment tips for lazy Investors: The 2022 Edition
Final words
Investors investing in the financial market should be aware of these behavioural biases that they do unconsciously. These behavioural biases influence one's decisions through various factors and emotions, risking their investments.
