Know your behavioural biases before investing ?
Investing is not an easy task. One has to evaluate the company business, its scope for growth, economic headwinds, and management capabilities to name a few. However, one has to be rational in his approach while doing so. We, as humans, are prone to bounded rationality and have our biases and traits that may not make us completely rational. Here is a list of a few biases, which you should be aware of before investing:
Conservatism: We try and maintain our prior views and do not incorporate new information at all. This resistance to newer information may hurt the portfolio in the long run.
Confirmation bias: We try to make our own beliefs strong by selectively choosing new information that supports our prior belief and ignore the information that contradicts our belief. This will hurt the portfolio as we try to stick to our beliefs even when there is new information that should have modified our initial belief.
Illusion of control bias: People, sometimes, believe that they have control on their portfolio returns or they can influence it. We give probability of personal success higher weight than it should be given.
Anchoring and adjustment bias: When we have to estimate the value with unknown magnitude, we may begin with some initial anchor value, which we then adjust up or down to reflect subsequent information. This is dangerous because the initial anchor value may not be appropriate.