Have you ever noticed that your deep-rooted biases have many times stopped you from taking the right actions? Many investors have their preferences and biases that drive them to make emotional decisions. This holds while making financial decisions.
What is an investing bias?
An inclination or prejudice towards a person, group of persons, choices, or situations is called a bias. When you have a bias towards an investment due to past experience, herd mentality, etc., it is called an investment bias or investing bias.
Investing biases and their impact on investments in mutual funds and stocks
- Bandwagon bias or heard mentality
If you take adecision to invest in mutual funds or stocks based on what your friends or relatives are doing, it is called herd mentality.
Solution: You must have heard people saying that they joined a course because their friends opted for it. Stop copying others and start thinking about the effects of your actions on your finances.
- Confirmation bias
Investors have a tendency to believe any information that confirms their views. With social media, people are putting their views forward through videos or articles all over the internet.
Solution: You must obtain information from all sources irrespective of the fact that they differ from your presumptions.
- Anchoring bias
When you do not pay heed to the worth of an investment and rather make your decisions based on pre-existing information, you can suffer huge losses.
Solution: Do your own thorough research whenever you analyse an investment. Doing so could save you from making hasty decisions that you would later regret.
- Hindsight or hunch bias
It makes an investor believe that their predictions are correct. It can also be called overconfidence. If one of your predictions was correct in the past, it doesn’t mean that the same might happen every time.
Solution: Listen to expert opinions and try to analyse them before deciding to invest in stocks or mutual funds. There is a high probability of a correct decision in this case.
- Recency bias
The bias that makes you give more weightage to recent trends rather than historical events is called recency bias. This makes your viewpoint restricted.
Solution: Stick to a chosen strategy even if there are short-term fluctuations.
- Concorde fallacy or status quo bias
This means sticking to an investment that is not generating any returns. You can redeem your investment and pick another option that generates higher returns.
Solution: You should devote some time to analyse your investments and the modifications that will improve your returns.
- Risk-aversion bias
Risk-averse investors generally avoid treading in high tides. They believe in low risk instruments like fixed deposits and fail to consider equity. This keeps them away from a high-paying investment.
Solution: Always play on merits. Build an investment portfolio to reduce your risk and increase your exposure across different investments.
- Attention bias
When you have massive information, your attention to detail might be reduced and you might end up overanalysing. This could cripple your decision-making skills.
Solution: Avoid analysing irrelevant information. Paying attention to relevant information would help you make prudent decisions when it comes to investing in mutual funds, real estate, stocks or any other asset.
- The Illusion of control bias
It is not important to make the right decisions or time the market correctly. Investor bias based on clear beliefs in stock markets makes them suffer huge losses.
Solution: You must keep learning the market changes and new strategies. Investing needs continuous monitoring.
- Attachment bias
Investors feel attached to some investments that have consistently paid off. While it is natural to feel connected, you must not lose your rational analysis.
Solution: You should look for opportunities that can pay higher returns rather than connect emotionally.
- Lifestyle bias
Higher income gives you a license for higher spending. People think that they need to maintain a wealthy lifestyle; however, it is important to save and invest the excess money.
Solution: Maintaining a strict budget could save you from overspending and make you invest more.
