Modules for Investors
Investment Biases - Part 1
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Decision making bias: I want to decide!
Decision making bias simply means that you as an investor want to control things and decide everything by themselves. It's like wearing your favorite shirt for an exam because it's good luck to you. Or you want to sit on the backseat because it is safe according to you. This does not lead to the conclusion that it will change the outcome altogether, but focusing on faith and wanting to control the outcome is actually stressful and harmful.
Decision making bias is also commonly referred to as the "confusion of control" because it confuses the trader that the trader can control the profits and losses of the market. It is natural to assume that you have more control than reality. The illusion of control plays a game of initiative with your mind, which often reduces your ability to make decisions because your mind cannot see a clear picture.
In the false illusion of control an investor may think that he can predict that a particular investment will prove profitable, and falsify any news that contradicts his belief, and focuses on investing more and more. Does. This will make the portfolio focused on a specific type of investment, making it unbalanced. Also, it increases the chances of risk.
Decision-making bias results -
Restricting investment- Thinking that a given investment sector will give good results and not to invest capital on any other diversifying portfolio.
Avoiding the value of information - It is responsible to consider the information available but it is not right to look at your investment pattern only to analyze it. If you do not see the information correctly, it will not be useful to read reports, look at charts and study the practice of the past.
Trade with extreme confidence - Since traders feel that they are ready to understand the nuances of the market, they go beyond the trading limit and start investing. Even if you have a healthy portfolio, it will only dissolve stability and there will be a greater risk of loss.
Ways to overcome the bias-
There are ways to deal with this decision bias and cross the thought process that can harm your investment, we just have to focus on these to make better decisions-
Keep confusion and blur in mind before making a decision - always remember that one should never be too confident and make investment decisions on your own. It is important to have a rational state of mind before investing.
Challenge Your Opinion - If you can find information that supports your views and decisions, try to find reports that may contradict your opinion. Read it, analyze it and try to understand it with an open mind.
Look for Red Flags - Even if you are already in favor of decision making, you can still see red flags if you want. Look at them and do not cross without solving them.
Ensure Your Ratio of Risk - Before making an investment plan check the ratio that you can accept for risk of loss. Even if you are sure of the benefit but should not be played with the balance. When breaking this limit you will think deeply about the decision making bias.
Now that we have understood the risks and resolutions for decision-making bias, we are ready for the next bias, aspiration bias.
A quick recap
Let us now quickly repeat the chapter and remember what we have studied-
- Decision-making bias is a stubborn overconfidence that even if there is no market certainty, your qualifications and experience enable you to predict profit and loss.
- It is difficult to deal with the decision-making bias when you have made a correct guess in the past and it thus focuses on what you have lost.
- By avoiding red flags and reading information that opposes your views, you can avoid decision making and get a clear view of the market.