Know your behavioural biases before investing!

Behavioural biases can hurt your financial well-being, as they tend to result in suboptimal decisions. Being aware of your behavioural biases help an individual take better decisions and thereby, be immune from losses that are avoidable.

Here are two behavioural biases that can be avoided:

Self control bias-People tend to lack self control while investing for long-term. There is an inherent conflict between achieving long-term goals and short-term satisfaction. People tend to display myopic view and focus more on the short-term gratifications instead of waiting for long-term goal achievement. This is seen when one books profit in a stock for a short span of time, even when the stock has a potential for long-term. This behaviour has a serious consequence as it may lead to one not saving enough for his/her retirement and instead focus on short-term goals. One should be aware of this bias and try to maintain self-discipline while investing.

Regret aversion bias-People tend to stay invested in the stocks that have shown sharp downward movement in prices. Rationally, one should analyse the stock as per their current situation and future prospects while, making a buying/selling decision. However, one adds to the price at which he buys the stock too, in this equation. This results in people holding onto losing stocks for too long in a hope to recover the cost and turn profitable. They are reluctant to sell because they fear the stock will increase in value and they would regret for selling it.

One should be aware of such behavioural biases, while making financial decisions and make sure that we do not fall prey to them. Knowing your biases would help you in making better decisions