Behavioural biases that impact your Investment decisions

Irrespective of what asset classes you favour more, your behavioural tendencies will always play a great role in your success or failure as an investor. It's strange but true that the behavioural traps do impact your investment decision and wealth creations. Here are some behavioural traps/biases which should be avoided by mutual fund investors in the upcoming year.

Sunk-Cost Bias

Sunk cost bias is the human tendency because of which people follow the activity which is not meeting their goals irrationally as they have spent time and money on it. This can be explained with a simple example. For instance, Mr. A has invested in a scheme since last 7 years which is not performing as per his expectation, but still, he is avoiding an exit from the same in the hope of recovery. This clarifies that the sunk cost bias tends to put a hold just because the higher horizon of investment and tends investor not to exit the underperforming investments. Investors are suggested to avoid this trap if he finds similar investment avenues from the same asset class are performing well and the investment chosen by him seems to be incompetent then it is good to exit from there.

Loss Aversion Bias

With the current market scenario, it can be observed that the upcoming year would not be a year full of upsides and returns as was 2017. Currently, we can see a contradictory position, on the one side, we are looking at increased infra spending, increasing capacity utilisation, improvement in bank balance sheets and on the other side high valuations, inflation threat, rising interest rates, global liquidity tightening etc. With these factors, it is clearly stated that there will be volatility in the market in the coming year. In such a situation, investors have to fight their tendency to exit investments as soon as they slip into the smaller losses, that is, the loss aversion bias.

Conservatism Bias

With the exceptional performance of equities in 2017, every investor is ready to put his money in equity mutual funds and have formed a secondary opinion about debt funds in light of higher bond yields. This is the conservatism bias, investors are advised to avoid this and follow a disciplined investment strategy with a proper allocation of investment towards various asset classes.

Confirmatory Bias

Confirmatory Bias is closely related to the conservatism bias. It impacts investor viewpoint which he forms according to changing dynamics. This bias force investor to seek out information that parallels to his own point of view. For instance, if an investor is bullish on equities, he will search for the analysis that echoes his viewpoint, while conveniently ignoring the others and vice versa. However, with the higher volatility coming out in 2018 investors should drop this bias and focus purely on real facts and data, while defining and taking investment decisions.