What's your bias?

Knowing our biases can help us become better investors. So what are yours?

  1. Confirmation bias
    The confirmation bias refers to the phenomenon of seeking selective information to support one’s own opinions or to interpret the facts in a way that suits our own world view. Investors seek confirmation for their assumptions. They avoid critical opinions and reports, reading only those articles that put the point of view in a positive light.

  2. Availability/Attention bias
    The attention bias states that things such as products, companies, and issuers that are more frequently present in the media will be remembered more quickly by investors when they look for a suitable investment instrument.
    Bad or scarcely accessible information is (unconsciously) not considered.

  3. Home bias
    Statistics show that most investors tend to buy stocks from companies in their home country. These stocks seem more trustworthy, and investors grew up with these company names. They are also mentioned more frequently in the local media.

  4. Favorite long-short bias
    People who fall into this psychological trap always bet on the long shot, because it promises very high returns. Unfortunately, they forget that the likelihood of the long shot winning cancels out the profit in the middle.

  5. Anchoring
    When making decisions, investors do not rely on fundamental factors. Rather, they tend to base their decision on the price at which the original or last position in a stock was purchased. This purchase price is the anchor and causes irrational decisions. Unlike the acquisition cost, the new price seems cheap to the investor. Anchoring influences individual decisions based on the fact that investors do not realize how the information is presented. When it comes to making decisions, people seem to be influenced by random data, even if they know that the data has no informational value or is outrageously high or low.

  6. Myopic loss aversion
    Most investors fear losses more than they enjoy profits. If these investors look at their stock performance too often, they usually see they have lost money and sell everything off again. A long-term view would be better. They should check their stock performance less often. The more they can keep their curiosity at bay, the more likely they are to turn a profit with their investments, provided that the portfolio is broadly diversified.

  7. Mental accounting
    Many private investors engage in mental accounting, i.e., they make distinctions in their head that do not exist financially. Often, losses incurred are viewed separately from paper losses. This means that people sell stocks from their portfolio too soon when they make a profit and too late when they make a loss. So mental accounting makes us think that
    a franc is not worth a franc – a dangerous attitude.

  8. Disposition effect
    Gains are realized too early and losses too late as a result. Turning a paper profit into real profits makes us happy, while we shy away from turning a paper loss into a real loss. One possible explanation is mental accounting (see above).

  9. Overconfidence
    In most cases, we overestimate our own abilities and think we are above average. Notably, most experts also overestimate themselves – frequently to a greater degree than laypersons do. Overconfidence is often seen when the markets are on the rise.

  10. Hindsight bias
    The statement “I knew the whole time this would happen” shows that hindsight is 20/20 and that we have an explanation for everything after the fact. This is known as the hindsight bias, which is a problem because it keeps us from learning from our mistakes.

  11. Get-even-itis
    Once we have lost money we take a greater risk to make up for it. Get-even-itis can cause us to place everything in one basket and probably lose even more money.

  12. Representativeness bias
    After even a brief period of positive returns on the financial markets, we may think the world has changed for the better. People tend to think in schemes and stereotypes learned in the past. They arrive at a result too quickly and based on imprecise information.

  13. Gambler’s fallacy
    Here, the effective probabilities are greatly underestimated or overestimated. This can mean that, based on the (false) assumption that prices are about to drop, we sell too soon and vice versa (assumption that the prices will recover soon, even though they are not (yet) doing so).

  14. Framing bias
    Decisions are based largely on how facts are depicted in statistical terms. For instance, we do not think that “Four out of ten are winners” and “Six out of ten are losers” mean the same thing. The statement is identical, but most people don’t realize it.

  15. Regret avoidance
    If we invest in a blue chip stock and it does not perform as hoped, we call this bad luck. However, if we invest in a niche product that fails to perform well, we tend to regret this more than we do the failure of the blue chip stock. This is because many other people have made the same mistake and thus our decision to buy it does not seem so wrong.

Source: https://www.credit-suisse.com/media/assets/private-banking/docs/mx/wp-07-behavioral-finance-en.pdf

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We all have all of them.

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Personally (in both meanings) I would also add a “need to be active” bias. But of course Credit Suisse will not put it in their list.

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So true! It’s also supporting expensive actively-managed funds and earnings from trading-fees :grin:

For me personally, it’s the urge for market-timing (probably anchoring bias), since I’m about to invest a large sum.

Charlie Munger listed 25 human biases in his fantastic speech called The Psychology of Human Misjudgment, included in Poor Charlie’s Almanack.

You can find the transcript here: Psychology of Human Misjudgment (Transcript) by Charlie Munger

Another bias - favorite of mine - that was not listed so far is the inability of the brain to grasp exponential growth (also called Weber’s law).
Would you prefer that I give you:
-a) 700k CHF now, or
-b) 1 Rappen doubled every day for 30 days
The way the question is framed, our brain is incapable of figuring out that proposition b) is one order of magnitude bigger than proposition a). It is worth a bit more than CHF 10 million, by the way). This has far-reaching consequences in the tendency of market participants to systematically under-rate the value of long term profitable compounders…

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I have them all.

The real challenge farming VT forever is to not do anything else.

The need to be active bias is one of the worst for me

If I used all the time following the stockmarket / trading for income producing activities, I would probably have a higher net worth today :slight_smile:

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Reviving this conversation: Now that I’ve spent all my dry powder on VT, there’s nothing left for me to do but wait for compounding to kick in.

It goes against my nature to just not do anything, that’s why there’s a huge risk for me to fall for some particular bet (or “tilt”, how the financial industry would call it more alluringly).

And even worse: The risk of losing precious time of my life on over-researching stuff.

How do you deal with this urge?

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Good thing is that you spend all your money now, so you can relax. Go out in nature, spend time with your loved ones, have a beer with friends.

There are so many more important topics than money. Also, don’t worry about the current drop - you are investing for long-term. That’s why a lot of the stuff we discuss in this forum is not worth spending so much time and energy on. :slightly_smiling_face:

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I’m never gonna worry about a drop, because I’m in this game for the long run :grin:

It’s just been so much embedded in me that all success comes from putting hard effort and labor into stuff, but the concept of passive investing and waiting for the compounding effect goes so contrary to this :sweat_smile: Actually, the more you do, the more you lose.

So I totally agree, I’m ginna go out to enjoy the nice weather :sunglasses:

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I guess its best if your life is busy, so you dont have time to come up with stupid investment ideas.

However, if you want to actively “do” something with your money, I can recommend this guy here:

He has been outperforming the market for decades, and every transaction is written on his blog.

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Same here, same here. I saw an anecdotal statement that some of the millionaires in US that you would never think they are, were averagely earning office worker ladies who didn’t do anything else but to dump all their excess cash into S&P500 index funds - for 40-50 years.

Going back to the original question: do something else. A work towards carrier advance is also a great investment. Or anything else, or nothing in particular.

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If you have the urge to gamble, then you can still allow yourself for example a 5% gamble portfolio. If you make some extra money then thats perfect, and otherwise its a good reminder, why you have those 95% in (a) passive etf(s):slight_smile:

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I have an allocation to bonds. That way when markets move and I have the urge to do something, I do the best thing: rebalance. And I feel like I accomplished something.

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I’m “the worst” when it comes to this, but if the quest for an always better financial situation is a driver for this, a solution could be focusing on increasing your contributions by furthering your career or launching a side hustle.

If it’s the fiddling with spreadsheets/other tools and looking at numbers/graphs part that takes your interest, fiddling with other data might do it (expenses tracking, categorizing and optimizing looks to me like an ideal victim).

If it’s neither of those, focusing on other aspects of life while reveling in the fact that my financial life is in order and I don’t have to worry about it anymore, as suggested before, would be my best bet.

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I can second that. In my case moving spreadsheets & VBA macros to a Jupyter notebook does the trick and I’m learning something along the way.

Given my slow pace, and once done the obligatory ‘analysis paralysis’, I should be save for a while. :sweat_smile:

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