Know these behavioural biases before you start investing

Biases can have adverse effects on portfolio performance. Here is the continued listed of behavioral biases from.


Mental accounting: It is an information processing bias, in which people create baskets and treat two baskets with the same sum of money differently, based on the aim of the money. This contradicts rational behavior because money should be seen as fungible.


Framing bias: This is another information processing bias, in which the decision one takes depends on the way information is presented. For example, probability of 25 per cent gain would be seen positively as against 75 per cent chance of no gain. This is because of the way the information is framed and presented.


Availability bias: This is also an information processing bias, in which easily recalled outcomes are often perceived to be more likely event than a harder to recall outcome.


These biases result in faulty reasoning and investment analysis. Individual may think that they are following a rational path but they may be prone to such biases, which will make results to be an outcome of not so rational thinking. So, the next time you decide to invest, do make sure you have considered these biases and, hopefully, avoided falling prey to them.