I left my job as a professional investor to help people like you.
Here are 10 Behavioral Biases Fund Mangers suffer from:
Here are 10 Behavioral Biases Fund Mangers suffer from:
1️⃣ Prospect Theory
According to prospect theory, losses impact us twice as much as gains do.
For instance, most people hesitate to play a game of chance, like Heads or Tails, where they could win $100 but might lose $50.
Statistically, it's a bet worth taking every day.
According to prospect theory, losses impact us twice as much as gains do.
For instance, most people hesitate to play a game of chance, like Heads or Tails, where they could win $100 but might lose $50.
Statistically, it's a bet worth taking every day.
2️⃣ Irrational Behavior
People aren't always rational. We often make irrational choices.
For instance, about 90% of Americans believe they're better drivers than average, and around 70% consider themselves smarter than the average person.
People aren't always rational. We often make irrational choices.
For instance, about 90% of Americans believe they're better drivers than average, and around 70% consider themselves smarter than the average person.
3️⃣ Our brains operate with two systems: System 1 and System 2.
System 1 is quick, intuitive, and automatic, but it can lead to biases and errors, like overconfidence.
System 2 is slower, analytical and deliberate, and it's essential for handling complex tasks.
System 1 is quick, intuitive, and automatic, but it can lead to biases and errors, like overconfidence.
System 2 is slower, analytical and deliberate, and it's essential for handling complex tasks.
4️⃣ Availability Heuristic
The availability heuristic is a cognitive bias where we assess the probability of an event based on how easily we can recall it.
For instance, after the 9/11 events, many people became more fearful to use airplanes.
The availability heuristic is a cognitive bias where we assess the probability of an event based on how easily we can recall it.
For instance, after the 9/11 events, many people became more fearful to use airplanes.
5️⃣ Halo Effect
It's a cognitive bias—your general impression of a person affects how you see their specific qualities.
If you like them, you tend to overestimate their abilities, and the other way around.
It's a cognitive bias—your general impression of a person affects how you see their specific qualities.
If you like them, you tend to overestimate their abilities, and the other way around.
6️⃣ Anchoring Effect
The anchoring effect is bias where the initial information you receive heavily influences your decision-making.
For instance, if you first encounter a car priced at $100k and then see one at $70k, you're likely to perceive the second one as cheap.
The anchoring effect is bias where the initial information you receive heavily influences your decision-making.
For instance, if you first encounter a car priced at $100k and then see one at $70k, you're likely to perceive the second one as cheap.
7️⃣ Sunk Cost Fallacy
The sunk cost fallacy occurs when you continue investing in something, even if it's no longer worthwhile, solely because you've already committed resources to it.
An example is persisting with a boring movie just because you've paid for the ticket.
The sunk cost fallacy occurs when you continue investing in something, even if it's no longer worthwhile, solely because you've already committed resources to it.
An example is persisting with a boring movie just because you've paid for the ticket.
8️⃣ Hindsight Bias
Hindsight bias is the inclination, after an event, to believe you would have predicted or expected the outcome.
For instance, after a baseball game, you might claim you knew the winning team would win, even if you didn't actually predict it beforehand.
Hindsight bias is the inclination, after an event, to believe you would have predicted or expected the outcome.
For instance, after a baseball game, you might claim you knew the winning team would win, even if you didn't actually predict it beforehand.
9️⃣ Framing Effect
The framing effect occurs when the presentation of information influences your decisions and perceptions.
For instance, studies have found that people often prefer "75% lean meat" over "25% fat meat," even though it's essentially the same product.
The framing effect occurs when the presentation of information influences your decisions and perceptions.
For instance, studies have found that people often prefer "75% lean meat" over "25% fat meat," even though it's essentially the same product.
🔟 Confirmation Bias
Confirmation bias is the tendency to seek information that aligns with your existing beliefs.
In investing, engaging with individuals holding opposing views can provide valuable insights and help counter confirmation bias.
Confirmation bias is the tendency to seek information that aligns with your existing beliefs.
In investing, engaging with individuals holding opposing views can provide valuable insights and help counter confirmation bias.
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I left my job to transform Compounding Quality into a full investment platform.
To celebrate, I am sharing an e-book with 300 pages (!) full of investment wisdom.
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I left my job to transform Compounding Quality into a full investment platform.
To celebrate, I am sharing an e-book with 300 pages (!) full of investment wisdom.
Sign up here if you want to receive it for free: eepurl.com
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