Investment biases are irrational assumptions and beliefs that keep us from making smart, knowledgeable investment decisions. They’re particularly difficult to overcome because they’re ingrained in our thinking. In fact, many investors don’t even realize their thinking is influenced by these irrational beliefs lurking in the background. Unless you take the time to learn your own biases and begin actively working to overcome them, these thoughts and emotions can end up costing you significant returns.
Watch out for these three common biases that impact investors every day:
Loss Aversion Bias
This bias comes from our fear of losing money. Have you ever noticed how it hurts more to lose a sum of money than it is exciting to win the same amount of money? In other words, we love to win, but we hate losing even more.
When it comes to investing, the fear of losing money can make investors overly cautious. This bias causes investors to avoid all risks and end up missing out on significant potential gains. It also pushes investors to hold onto bad stocks for too long because they want to avoid realizing the loss for as long as possible.
When investors overestimate their own ability or market knowledge, this leads to an overconfidence bias. In the long run, overconfidence blocks out investors’ ability to listen to outside advice, interpret market research, and react quickly to market changes. They believe they know the market best. Because they won’t listen to outside advice, they often miss key insights that could lead to greater returns.
Regret Aversion Bias
This bias is similar to loss aversion bias, but even more costly. Regret aversion bias means the investor is so afraid of making the wrong choice that they end up making no choice at all. Even when lucrative opportunities present themselves— like the opportunity to buy a dip or sell at a particularly high price point— the investor is paralyzed by fear and does nothing. As with loss aversion bias, regret aversion bias causes investors to miss major market moves and hold onto bad stocks they should have sold much sooner.
While these three biases are common, they can be avoided. By discovering your own investment tendencies, you’ll start to recognize when patterns of irrational thinking cloud your smart judgement. Plus, with so much expert advice at your fingertips, you can follow the guidance of stock trading professionals who know the market inside and out. The more you learn from reputable investing experts, the less your own biases will get in the way of your investing strategies.
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