Human decisions and behaviour are all subject to a host of biases on a variety of issues. How does a bias impact you? They push you to take decisions that you prefer to take than actions that you ought to take, given the situation. Investment decisions too, are certainly not exempt from bias. Let us discuss some of the common investment biases and how to overcome them.
Investors tend to base our decision from the first piece of information that is available. This bias is also called focalism. Once a decision is made based on the first piece of information, any subsequent information is also inferred in a such a way that it anchors the initial decision made.Practice Management Solution Video
Let us look at an example – We may end up holding loss making investments/funds based on the first piece of information that was received regarding the investment. Any subsequent fall in the value of the fund/investment may be due to actual deterioration in the fundamentals, but this bias will make investors to either hold on to bad investments or even worse buy more.
Investors can overcome this bias by properly valuing subsequent data around the anchor by proper research and further evidence from the new data.