How Biases Affect our Decisions, or We’re Only Human!

As humans we are prone to making decisions based on emotions, and investment decisions are no different.  Below are some investment biases to be aware of that may affect investment decision making.

Herd mentality bias is the tendency for investors to copy and follow other investors. Herd mentality bias is an emotional bias that is driven by the fear of being left behind that triggers a flight-to-safety reaction. Herd mentality bias will make investors follow the masses, follow the herd in an attempt to protect themselves.

Confirmation bias is seen in our inclination to see things through a filter of past circumstances, despite new information to the contrary.   It is the inability of people to change their own beliefs even in the face of new facts.  We all like to be right and learning new ideas can be difficult. Of course, failing to do an objective analysis of the current situation can lead to some misguided decisions and possible loss.

Anchoring bias is the subconscious use of irrelevant information as a fixed reference point or anchor for making decisions.  An example would be focusing on the price of a security exclusively or as an over weighted factor when considering a purchase.  Anchoring can effectively serve as a factor in a decision, but it is important to include other factors and to be ready and able to adjust your anchor.

In this very busy world where we are subject to a constant stream of information, it is perfectly normal for us to look for ways to simplify complicated investment decisions.   Awareness of the pitfalls of such shortcuts is the beginning of a more thorough analysis of investments and better decisions!

A Sara-Bay Financial advisor can help with these issues by doing the investment analysis and doing so with a calm and objective perspective.  Give us a call!




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