What psychological biases can affect your investing decisions?

What has practically helped me the most in my investments is creating clear criteria for stock selection, having a well-defined investment plan, and the discipline to follow the plan. So when I adjust my portfolio, I just follow the rules. Regarding the creation of criteria, I also need to be careful with my own bias. However, since I can analyze the criteria calmly and they don't change often, they are much less susceptible to it. Doing something like I do is my recommendation for investors to avoid letting their bias get in the way.

The way I took confirmation is the surety /authenticity of the project under investment. And mind you that the biggest threat of investors as many to get a cautious look above 60 % investment options are being found fake, not secure, having no protection (the actual official monitor). This makes brokers / dealers job more tough and dangerous too. And similarly the investors hesitate. Once the Project is confirm sure / authentic rest all is superb!

In a hyper-stimulated world, we are consciously and unconsciously forced to make snap judgments about people, places, life and work choices, purchases...and sometimes even risks and investment decisions. Thus, confirmation biases become second nature in order to function in this time-constrained world. When it comes to investment decision-making, however, confirmation biases can lead to devastating losses. To be a prudent investor who can make sound investment decisions, one has to consciously and continuously watch out for and unlearn one's confirmation biases (wherever they may arise). In investing, objectivity and clarity are crucial. And confirmation biases can be a powerful obstructive force in the way of objectivity and clarity.

Turn Confirmation Bias on its head. What has to be true that your existing belief is wrong? Actively try to falsify. Actively seek discussion with people that are opposing your belief.

Last month, I was evaluating a startup operating in a multi-million dollar market. I was particularly excited about the industry because the average CAGR was higher compared to others. I also noticed they were having good revenue growth. However, when I analyzed their bank statement I saw they weren't retaining much. So, I talked with a few experts from that industry to challenge my confirmation bias. Later, I realized that despite the company's favorable external appearance, there were internal issues, particularly with high receivables being discounted. This helped me make more informed investment decisions, as I was able to overcome my confirmation bias and consider all aspects more objectively.

Confirmation bias and overconfidence bias can significantly impair investment decisions. Investors affected by confirmation bias seek out information that supports their existing beliefs, ignoring contrary evidence. This is exacerbated by overconfidence bias, where investors overestimate their ability to predict market movements. The combination of these biases leads to a skewed perception of investments, often resulting in overly optimistic and risky decisions. Acknowledging and countering these biases is essential for a more balanced investment strategy.

The one we’re all guilty of. Finding that one economist or analyst or piece of data that supports our pre conceived (may well be rightly) outlook. I find the best way of handling this is to work in reverse. Spend the time delving and researching for the economist, analyst or data that disproves your thought or at least challenges it. That forces you to dig deeper and quantify further your thesis 👌🏼🚀

Those who develop a mathod to assess value of a scrip at a price and then do not get swayed by short term gains or losses but stick to their plan until the time some discernible development takes place forcing change of mind do have a last laugh.

One of the gravest mistakes in real estate investing is jumping in without conducting thorough research and due diligence. It's crucial to dedicate time and effort to gather comprehensive market data, analyze property specifics, and verify information through inspections. By neglecting this essential step, investors risk making ill-informed decisions that can lead to financial setbacks. ocation plays a crucial role in real estate investing, yet it is a mistake many investors overlook. A property's location influences its value, rental demand, and growth potential. Evaluating neighborhood amenities, proximity to schools, transportation options, and upcoming development projects are crucial factors to consider.

No, don't use stop-loss orders. 99% of private investors that us stop-loss orders believe that they can just cut off losses and still have the returns. Not true! Water your flowers and not the weed. Let your winners run. They are a rare species.

Most people don't want to sell their loosing position, cuz they don't know why they bought into it in the first place. When you're ready to put serious money into an investment, put serious time in researching it. If it doesn't perform according to your analysis and your thesis is wrong, get out. Don't sit on the horse with the broken leg, just for the sake of it. Admit defeat and look for new opportunities.

The most common phrase we hear from the market wizard investors featured in Jack Schwager's books is to cut your losses short and let your profits run. This is so important. I always cut not only my losing positions but also those that aren't performing well compared to the market, then I look for other stocks with greater strength. This is crucial advice for every investor who wants to do well.

"He who doesn't hold the papers when they are falling will not have them when they are rising." as André Kostolany kept saying. Which does not mean to buy into "falling knives" - but if you are convinced by the fundamentals of your speculation, you have to sit through the dips. If the fundamentals change though, then you have to kill your position asap.

For portfolio management, the simplest route to loss aversion is to build in a sleeping tablet to your portfolio. That is, add an asset that gives you the peace of mind of knowing that no matter what happens, that asset is in there to dampen any volatility - helps you sleep soundly.

Day trading, tendency to trade more and not to trade when its required all are recipea for disaster. So do what is something needed, sit back till then.

Loss Aversion: Investors tend to feel the pain of losses more acutely than the pleasure of gains. As a result, they may avoid taking necessary risks or hold onto losing investments for too long, hoping to avoid realizing a loss.

I want to share a story about a client of mine, a real estate flipper- it's one that has happened to many in the space. They had gotten into a flip as they normally would but the market turned right before listing. Instead of getting ahead of things, dropping the price, and taking a lost that would have been around $5-$10k, they decided to sit on the market for weeks hoping things would get better. It didn't. 5 months later it sold at a loss of $45,000. Loss aversion can blind investors and give false hope. It often makes sense to cut them early and spend your time and capital elsewhere.

Aversão a perda é, talvez, o viés mais comum que me deparo com os clientes. Inúmeras vezes ouvi a frase "vou esperar recuperar para vender", nesse momento é importante mostrar que o ativo muitas vezes já não tem o mesmo potencial que se acreditava nele no passado, além disso existem uma série de outros ativos que podem ser mais atrativos naquele momento.

Investing in the stock market requires discipline, emotional awareness, and time dedication. If you don’t spend enough time researching and/or fall into emotional trading, you’ll lose a lot. Stay aware of your emotions, invest in yourself first, and follow a data-driven system to analyze your investments giving it the time it deserves—you won’t ever need a stop loss!

It's so easy to think that what happened in the recent past will continue to happen, but of course, this is not true. One great example is that recently, a lot of investors thought interest rates would continue to be low forever, and suddenly that changed very fast. So, always study decades of history to see how things change, and you can avoid recency bias.

Recency Bias: Investors tend to give more weight to recent events or performance when making decisions, while discounting the importance of historical data or long-term trends. This can result in short-sighted decision-making and a failure to consider the broader market context.

O viés de recência é o fato do investidor acreditar que o passado recente tem mais possibilidade de se repetir do que outras variáveis. Normalmente me ancoro em fatores históricos para mostrar que o momento ruim do ativo pode ser passageiro. Por exemplo, ativos atrelados ao IMA-b (renda fixa com inflação) não performaram tão bem quanto o CDI ano passado (2023), porém eles costumam render acima do CDI no longo prazo e em janelas móveis de mais de dois anos, acredito que dessa forma fica fácil de romper o viés desse exemplo.

During a particularly bullish phase in the market, I noticed a series of successful IPOs, each with substantial short-term gains. I decided to invest in the next hot IPO, influenced by the recent successes. However, this new company didn't perform as expected and its stock price dropped significantly. My decision was heavily influenced by the recent performance of other IPOs, ignoring the specific risks and fundamentals of the new company.

Recency Bias is the tendency to give more weight to recent events or experiences over past ones. 📉📈 For example, after a series of wins or losses, you might expect the trend to continue, which can lead to overreacting and ignoring long-term patterns. To avoid this, keep the bigger picture in mind, use consistent and objective criteria for your decisions, and diversify your portfolio. 🔍📊 This helps prevent impulsive choices and supports sustainable success.

No one is immune against the herd. Evolution wired us that way. “When I see a bubble forming, I rush in to buy, adding fuel to the fire,” George Soros famously said. We mortals will most probably be burned by following the herd or trampled over by rushing in. If you cannot resist, allow a small percentage allocation to get into an emotionally neutral state.

I have been a Realtor and real estate investor for 20 years. When looking for investing opportunities, it’s important to understand the herd mentality bias. You need an agent who is following market trends closely. They will you will know how to find the best opportunities, based on your parameters. My stockbroker friend jokes buy high and sell low. It’s a reminder to stick to your plan. As your agent, I will keep you on track based on your goals.

Herd mentality can significantly impact investing decisions, often leading to irrational behavior and detrimental outcomes. As investors, it's crucial to recognize and mitigate this bias by maintaining independent thinking and relying on thorough analysis rather than following the crowd. Building a well-informed and rational investment strategy can help counteract the influence of herd mentality and lead to more successful investing outcomes.

Richard Thaler won a Novel prize for demonstrating that investors overreact to bad news and under- appreciate favorable trends, both evidence of herd mentality. For best outcomes, paddle your own canoe.

Sometimes, following the herd can be beneficial, and other times not. It’s not inherently bad—as long as you’re not following the herd blindly. You can leverage herd behavior for your own profit, but always consider the data you’re relying on and understand your own strategy. Remember, others might be playing a completely different game. Stay aware and invest in knowledge before investing in the stock market.

a.k.a. FOMO. This is incredibly powerful and dangerous bias to harbour, mainly because of mass financial illiteracy and it's easy to get swayed by peers and influencers. It's harder to find a stoic advisor who will try to prevent you from doing stupid things. Even the best financial advisors out there cannot prevent herd mentality or FOMO.

Herd Mentality or Herding Behavior: Investors often follow the actions of the crowd, particularly during periods of market volatility or uncertainty. This can lead to exaggerated price movements and the formation of speculative bubbles or panics.

Herd mentality is hard-wired in the psyche of the vast majority of humanity. Safety in numbers allowed our ancestors to survive a hostile environment comprised of rival tribes, carnivorous animals, swamps, etc. That hard-wiring manifests itself in investing too. All momentum trades are speculation by the herds on a popular trend that eventually becomes a bubble...till the absurdity of that trade becomes self-evident. When the bubble bursts, most speculators in the herd lose enormous amounts of capital resulting in misery. Yet, this pattern of unforced human error repeats itself over and over again. Ironically, if you want to survive and build longevity as an investor, it is critical to break away from the hard-wiring of herd mentality.

Herd mentality is real. Many retail investors only want to hear echoes of what they watch on CNN and CNBC. While these media outlets can be helpful as a tool, the swearing by the gospel within is purely herd ethics at play. The headline chasers, always late to the party.

O efeito manada, ou mentalidade de rebanho é um movimento psicológico muito forte. Podendo ocorrer em momentos de grandes valorizações ou de grande perdas. Normalmente ele ainda vem acompanhado de vários fatores, como notícias na mídia falando do movimento notável, notícias exacerbadas comentando a possibilidade de lucro no caso de bolhas ou de perdas em crash's, amigos ganhando ou perdendo dinheiro naquela situação. As questões dos extremos de mercado são amplamente demonstrada por Howard Marks em "Dominando Os ciclos de mercado" e como ele demonstra no livro, é importante ser um investidor analista e capaz de entender o valor intrínseco do ativo para se posicionar bem nesses ciclos.

Unfortunately, most people tend to follow the beat of the same drummer. What I’ve learned in my investment strategies is to listen to multiple sources and formulate your own opinion. Don’t just dive in headfirst without doing all your homework. Perfect example is I listen to Mark Cuban as he left the White House and discussed why he would invest in bitcoin all day long every day any day over gold.

Anchoring Bias in real estate can harm many new investors. We often come across a potential deal and get told of its opportunity. Whether it be location, price, or a potential "ARV". From the first piece of information they received, they decided to take it and run. Not seeking additional information on condition, neighborhood, or how comps are selling in the neighborhood. Investors over-rely on the first piece of information chasing the next deal, instead of doing further due diligence and saving themselves from a headache in the future.

O viés de ancoragem é comum no mercado financeiro, onde a primeira opinião ou análise pode influenciar fortemente o investidor. Além disso, esse viés também é observado nas redes sociais, onde influenciadores frequentemente utilizam a estratégia de serem os primeiros a promoverem produtos ou ideias, moldando o pensamento de seus seguidores. Essa técnica também é empregada na política para suprimir opiniões divergentes sobre determinados temas. Recomenda-se buscar múltiplas opiniões sobre um assunto e, sempre que possível, considerar perspectivas diferentes da inicial para reduzir a influência do viés de ancoragem.

Anchoring Bias: Investors may fixate on a particular piece of information, such as the purchase price of a stock, and use it as a reference point for future decisions. This can lead to irrational decision-making and an inability to adapt to changing market conditions.

Overconfidence Bias: Investors may overestimate their own knowledge, skills, or abilities, leading them to take excessive risks or trade too frequently. Overconfidence can result in poor investment decisions and suboptimal portfolio performance. Awareness of these biases is crucial for investors to make more rational and informed decisions. By recognizing and mitigating the impact of psychological biases, investors can improve their decision-making process and achieve better long-term investment outcomes.

Overconfidence bias is a trap. It is easy to fall into this trap particularly in areas where one has invested time and effort to attain a degree of expertise. 'Little knowledge is dangerous.' To avoid overconfidence bias, acute self-awareness is key. In fact, a healthy amount of self-doubt can act as an extra layer of defense against overconfidence. A healthy amount of self-doubt is also a mark of intelligence, humility -- and funnily enough -- of self-confidence. In investing, overconfidence bias can lead to hubris which, in turn, leads to an inevitable downfall. Thus, the antidote to overconfidence is to go through life with the humble awareness that no amount of knowledge or success should lead to a sense of invincibility.

When it comes to investing you can never be overconfident anything and everything out there can impact your investment strategy working with bitcoin is a completely different animal since everybody is involved in it, there’s only 21 million total bitcoin that will ever be there and they’re not yet all mine not until year 2140 but it’s a finite supply just like gold which people don’t tend to understand compared to other cryptocurrency, which is not based off this principal

We view the world from our unique perspective which by definition is a biased perspective. It’s built upon our past emotional response to living our experiences. So when viewing investment opportunities, I find it helpful to go neutral. Embrace the mind of a child and rebuild the world from the present fact patterns which helps me see things with significantly less bias.

Overconfidence is not necessarily a bias if it stems from a thorough understanding of an investment's objectives. A well-founded confidence arises from a deep comprehension of factors such as the investment's timeline, the client's risk tolerance, their understanding of market fluctuations, and the overall investment strategy. Having a nuanced grasp of these elements enables a strategic approach to positioning investments. Adhering to the principle that markets have cyclical patterns — what rises will eventually fall, and vice versa — underscores the importance of aligning investment decisions with the client's time horizon and risk appetite. In essence, true confidence in investing is built on a solid knowledge of market trends.

The belief that one can identify companies whose share prices will rise and benefit from trading from those into others exhibits a bais that can only result in lower returns to investors as a class. Trading is not free, and the fees, commissions and percentages of assets under management paid to advisors and sell-side institutions come at the expense of lower returns to the actual owners of the businessess that create the value. Wealth accumulation results from long term investment in well-managed entities with sensible balance sheets that grow more or less in line with the economy, reinvest a sufficient amount of their profits to sustain their growth, and distribute the balance to investors who will accumulate wealth as they grow.

Selection bias. We tend to know of only the best performers of a chosen field, whether financial or sports or show business. For every 100 persons doing the same exact thing, there are, perhaps, 4-5 who excel. And biographies are written about them. We ignore the 95% who weren't in the right place and right time but did exactly the same thing as the so called "geniuses" who make a splash on Page 3 from nowhere, as though they have been shipped from another planet. This is very pronounced in the investment arena (which includes asset managers, private wealth managers, advisors, family offices, etc)where winners have their 15 minutes of fame and quickly disappear into oblivion. This is closely tied with recency bias as well.

Most of the biases can be managed by speaking with qualified independent well wishers. For example one big personal decisions is who to marry. Avoid above biases by seeking council of your parents :)

While investing, we often make decisions based on emotion as the leading factor and later use logic as justification. Similarly when buying a new car, if something breaks in your current vehicle you may pawn it off as faulty and a new one is clearly needed. This is making an emotional decision of wanting something, then justifying it with "well something broke on my current one, it must be a lemon". Be careful allowing an emotional bias that skews your investment choices. Emphasize analysis or emotions.

Status Quo Bias: This is the tendency to prefer things to stay the same, leading investors to stick with their current holdings rather than exploring potentially better opportunities. Endowment Effect: This is the phenomenon where people value an owned asset higher than a similar asset they do not own. It can result in holding onto investments due to emotional attachment rather than rational analysis. Mental Accounting: This involves treating money differently depending on its source or intended use. For instance, an investor might treat bonus money as "fun money" and take higher risks with it compared to their regular income.