scorecardresearch3 biases harmful to your financial health that you must overcome

3 biases harmful to your financial health that you must overcome

Updated: 06 Mar 2023, 01:06 PM IST
TL;DR.
Psychology plays an important role in financial and investing decisions. In this article, we will learn about various psychological biases that impact our investment decisions.
Wealth advisors suggest that investing through SIPs is a good strategy 

Wealth advisors suggest that investing through SIPs is a good strategy 

The success of investing and psychological factors go hand in hand. It is irrelevant to mention that there are two types of investors in the stock markets, one who does not have much control over their emotions and makes mistakes when the market is highly volatile. Second, are those who make money because others are making mistakes.

If you want to become a successful investor and create wealth, you have to overcome the following psychological biases to make an informed decision:

Confirmation bias

Confirmation bias is a cognitive bias that refers to the tendency of individuals to seek out and interpret information in a way that confirms their pre-existing beliefs or hypotheses while ignoring or dismissing information that contradicts those beliefs.

For example, an investor who believes that a particular stock is a good investment may only seek out news or opinions that support that belief while ignoring information that suggests the stock may be overvalued or have other issues.

To avoid confirmation bias, investors should strive to seek out information from a variety of sources, including those that may challenge their beliefs or opinions, and should approach investment decisions with an open mind and a willingness to consider all relevant information.

READ MORE: Can personal biases adversely impact your portfolio?

Overconfidence bias

Overconfidence bias in investing refers to investors' tendency to overestimate their abilities and knowledge, leading them to make overly optimistic and risky investment decisions.

For example, Overconfident investors may believe they can consistently beat the market or achieve above-average returns, leading them to take on more risk than is appropriate for their investment goals.

You can overcome the bias with the bits of help or various ways:

  • Diversifying can help to minimize the impact of any one investment, reducing the risk of losing significant amounts of money on a single asset.
  • Making impulsive decisions can be dangerous in investing, as it can lead to a higher likelihood of making mistakes. Taking a disciplined and strategic approach can help to reduce the risk of making impulsive decisions.
  • Staying up to date on market trends and news can help you to make more informed investment decisions. This can help you to avoid making decisions based on outdated or inaccurate information.

    READ MORE: 7 common biases of investors that can impact their investment decisions

Anchoring bias

Anchoring bias in investing refers to the tendency of investors to rely too heavily on a particular piece of information, such as the price at which they purchased security when making subsequent investment decisions. It can lead to investors overvaluing or undervaluing security based on the initial anchor and can result in suboptimal investment outcomes.

For example, suppose an investor purchased a stock at a high price and the stock subsequently declined in value. In that case, the investor may become anchored to the initial purchase price and be reluctant to sell the stock, even if there is evidence that the stock is unlikely to recover its value.

You can overcome anchoring bias by doing in-depth analysis and research of the company's fundamentals, which gives you true and fair information based on which investing decision has to be made.

Conclusion

Biases are just a physiological phenomenon that sometimes leads in the wrong direction, which ultimately refrains you from grabbing wealth-creating opportunities. Overcoming these biases not only helps you in rectifying your past investment but also helps you in protecting capital.

Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com

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First Published: 06 Mar 2023, 01:06 PM IST