Investing Psychology: Investment Biases
Behavioral biases are not uncommon, especially if you follow the HQbroker Reviews premise of behavioral finance. Investors have different biases that affect their investment decision-making. According to the principles of behavioral finance, these biases cause market anomalies that can be exploited for a chance to get higher profits.
These biases can be cognitive, meaning investors have the tendency to think and behave Forex Online Trading in a specific way. They can also be emotional, meaning investors tend to take action relying on feeling rather than fact.
Here are some of the investment biases that can affect an investor’s investment decisions.
Most of the time, it’s difficult to shatter first impressions. This is because we, unconsciously or consciously, selectively filter. We focus on the information that confirms our opinions, ignoring others that do not support what we first believe in.
Investors that have this bias tend to look only for information that reaffirms his or her original perception or idea of an investment instead of viewing other opinions that contradicts the original belief.
Regret Aversion Bias
This is also called loss aversion. This makes the investor want to avoid the feeling of regret, which can be caused by poor decision making.
This bias explains why an investor may still try to hold on to losing investment and refuse to sell it. The underlying reason is that he or she doesn’t want to face the fact that he or she has made a wrong investment decision.
Disposition Effect Bias
This bias explains why some investors label investments as winners or losers prematurely. The disposition effect bias pushes an investor to hold onto an investment that has already lost all of its upside—just because he or she thinks it’s a winner. Conversely, he or she will let go or sell a winning investment too early as she tries to make up for the previous losses.
This can be very bad for you because it can increase capital gains taxes, while decreasing returns even before taxes.
This is another very common bias among investors. This bias makes an investor think after the fact that the coming a past event was predictable and totally obvious even if in fact, the event was totally impossible to have been predicted by anyone or anything.
This bias takes place when investors prefer familiar or well-known investments in spite of the obvious potential gain from diversifying investments. The investors will sometimes experience anxiety when he or she tries to diversify or invest in something he or she has never tried before. This bias prevents an investor from exploring possible good investment outside of his perceived comfort zone.
Avoid These Biases
It goes without saying that you should avoid these biases in order for you to get better chances in your investments. To avoid them, you must keep in mind that even you can be prone to such biases. The best course of action is to think logically and always consider your investments objectively.