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Your Brain Plays Tricks on You!
Emotions taint our judgment and we do things that don’t make sense.
Our brain also deals with millions of data points daily. It has learned to cut corners to process faster.
= Investment Biases. What are they & How to avoid them.
--THREAD--
Emotions taint our judgment and we do things that don’t make sense.
Our brain also deals with millions of data points daily. It has learned to cut corners to process faster.
= Investment Biases. What are they & How to avoid them.--THREAD--
1. Confirmation Bias
The tendency to look for information confirming what you already believe.
E.g. I believe Apple $AAPL is amazing. I might assign more value to an investing firm telling it should be traded over $150/share than to the one explaining why AAPL is at risk.
The tendency to look for information confirming what you already believe.
E.g. I believe Apple $AAPL is amazing. I might assign more value to an investing firm telling it should be traded over $150/share than to the one explaining why AAPL is at risk.
2. Consensus Bias
If most investors in your environment agree that $JNJ is a div stock to hold, it may be hard to go against the crowd.
It might not be such an amazing stock, but it “becomes one” since everybody is going in the same direction.
(Yet, $JNJ is amazing!)
If most investors in your environment agree that $JNJ is a div stock to hold, it may be hard to go against the crowd.
It might not be such an amazing stock, but it “becomes one” since everybody is going in the same direction.
(Yet, $JNJ is amazing!)
Strangely enough, we see that bias even with professionals! 
Here's a recent example with Tesla $TSLA. A massive number of retail investors rushed into it in 2020.
How many different Robinhood accounts hold this new darling!!
Here's a recent example with Tesla $TSLA. A massive number of retail investors rushed into it in 2020.
How many different Robinhood accounts hold this new darling!!
3. Regret/Loss Aversion Bias
The pain of losing money is greater than the joy of making some.
E.g. Investors rather wait for the next dip than buy at peak levels - they’re afraid to lose.
Keeping your losers forever to not materialize your loss.
The pain of losing money is greater than the joy of making some.
E.g. Investors rather wait for the next dip than buy at peak levels - they’re afraid to lose.
Keeping your losers forever to not materialize your loss.
4. Hindsight Bias - “Playing Monday morning QB”
Looking at the past to explain the present.
The crash was obvious in January; Covid was spreading everywhere!
Everybody should have bought AMZN 10 yrs ago; retail’s future is online!
But predicting ahead is not so simple.
Looking at the past to explain the present.
The crash was obvious in January; Covid was spreading everywhere!
Everybody should have bought AMZN 10 yrs ago; retail’s future is online!
But predicting ahead is not so simple.
5. Anchoring Bias
You got a theory in mind. Your brain will rely heavily on a handful of facts which support it.
Eg. Holding Macerich $MAC on the fact it was once $90/share. Citing Japan to explain the market is going to collapse. And, of course, focusing on 70’s stagflation.
You got a theory in mind. Your brain will rely heavily on a handful of facts which support it.
Eg. Holding Macerich $MAC on the fact it was once $90/share. Citing Japan to explain the market is going to collapse. And, of course, focusing on 70’s stagflation.
6. Recency Bias
Like anchoring, but gives more weight to recent events. Drawing conclusions on the past 10-20 yrs may still mislead you.
Considering recent history is important. But ignoring how similar crises were handled could cost a lot. History does tend to repeat itself.
Like anchoring, but gives more weight to recent events. Drawing conclusions on the past 10-20 yrs may still mislead you.
Considering recent history is important. But ignoring how similar crises were handled could cost a lot. History does tend to repeat itself.
7. Overconfidence Bias
A bias we're all guilty of at times as DIY investors.
We believe we have an edge. We don’t have to think we are geniuses; we just must believe we are better than the average
.
Our holdings will always outperform the market, ‘cause we picked them, duh!
A bias we're all guilty of at times as DIY investors.
We believe we have an edge. We don’t have to think we are geniuses; we just must believe we are better than the average
.Our holdings will always outperform the market, ‘cause we picked them, duh!
What is the ultimate solution?
Acknowledging our biases is a start.
Our brain will always find shortcuts. It’s our responsibility to take a pause and think twice.
A detailed investment process remains the most effective weapon.
Mine here: https://bit.ly/318wDmn
Acknowledging our biases is a start.
Our brain will always find shortcuts. It’s our responsibility to take a pause and think twice.
A detailed investment process remains the most effective weapon.
Mine here: https://bit.ly/318wDmn
