WIN THE TUG-OF-WAR BETWEEN REASON AND EMOTION

WIN THE TUG-OF-WAR BETWEEN REASON AND EMOTION

INVESTORS OFTEN BANK ON BEHAVIOURAL BIASES OVER SAGE ADVICE
 

Research, analysis and good advice notwithstanding, most investors are impacted by some unique psychological factors relating to their portfolio and investments. Here we deal with some of those behavioural aspects of investors that everyone should try to avoid when there’s a tug-of-war between reason and emotion.
 

• LOSS AVERSION BIAS
   

Investors often prefer to sell those assets and stocks which are in profit rather than selling the ones in which they have incurred losses. Investors also tend to remember their losses more vividly than their profits, even if the losses are less than their profits.
 

• CONFIRMATION BIAS
   

Investors often try to hear those advices which are in sync with their own views even if those views affect their investment decisions. So by not caring to hear the differing views they may miss out on winning investment ideas.
 

• CONTROL BIAS
   

A large number of investors feel they could spot winning stock or investment ideas even if the reality is that they are not trained or experienced enough to spot such stocks or ideas. They feel by being in control of their investments they can beat even the best of fund managers.
 

• RECENCY BIAS
   

Often investors invest in those funds, stocks or investment ideas that have just recently outperformed most the peers. Such behaviour often lead to herd mentality with a large number of investors chasing the winners of recent past. Research, however, show that such a strategy rarely works in favour of investors.