Top 5 biases in investing

We all have our own biases, blinkers and filters through which we see the world at large and become judgemental about people, events, policies of the government, and everything else, including the stock markets. In the case of stock market investing, we are all prone to taking decisions based on various kinds of biases. These biases are difficult to eliminate altogether, butwe can try to mitigate their influence on our decision-making process by adhering to a strict set of rules and adopting a disciplined approach. Let us understand the kind of biases we have and how their influence can be minimised.

Confirmation bias:When someone agrees with your opinion, you tend to put more weight on your opinion assuming it to be correct, which may be lead to a wrong decision. This is confirmation bias, which misleads you into believing that you are right when, in fact, you may be wrong.

Status quo bias: Most of the investors and traders go back to the same stocks over and over again as they do not wish to venture into the new and the unknown. Although it is a sound investment strategy to stick to stocks which an investor understands, it limits the potential to make profit on new ideas and opportunities.

Bias of positivity or negativity: When the market goes up for five consecutive trading sessions, there is a positivity bias that provokes the trader and investor to assume that it will continue to go up for the sixth trading session as well. On the other hand, when the markets slides down for five consecutive sessions, the bias of negativity takes over and marketmen tend to assume that the market will decline in the sixth session as well. In the case of positivity bias, positive news about the market receives more weightage than negative news, while in the case of negativity bias, negative news is given more weightage.

Bandwagon effect: This bias is particularly evident when the markets are scaling new highs or hurtling downhill. Everybody jumps on to the bandwagon and starts buying frantically in a bullish market or joins the selling spree in a crashing market.

Loss-aversion bias: An investor who is holding on to a stock that has crashed 80-90 percent from the purchase price does not want to sell it because he is not willing to admit that he has suffered a loss and hopes that the price will someday bounce back to the level of his purchase price! By holding on to the dud stock, he is paying the opportunity cost of not cashing out and reinvesting the salvaged amount profitably in a better stock.