What Is Bias?

Bias is an illogical or irrational preference or prejudice held by an individual, which may also be subconscious. It's a uniquely human foible, and since investors are human, they can be affected by it as well. Psychologists have identified more than a dozen kinds of biases, and any or all of them can cloud the judgment of an investor.

Understanding Bias

Besides warping the ability to make a decision based on facts and evidence, bias also tends to ignore evidence that doesn't align with that assumption.

A bias can be a conscious or unconscious mindset. When investo🐲rs take biased action, they fail to acknowledge evidence that contradicts their assumptions.

Smart investors avoid two major types of bias: emotional and cognitive. Controlling them can allow the investor to reach a decision based on available data.

Common Biases in Investing

Psychologists have identified a number of type♋s of bias that are relevant to investors:

• Representative bias may lead to snap judgments because of a situation's similarities to an earlier matter.
• Cognitive dissonance leads to an avoidance of uncomfortable facts that contradict one's convictions.
• 澳洲幸运5官方开奖结果体彩网:Illusion of control bias is a cognitive belief where investors overestimate their ability to influence outcomes.
• Home country bias and 澳洲幸运5官方开奖结果体彩网:familiarity bias lead to an avoidance of anything outside one's comfort zone.
• 澳洲幸运5官方开奖结果体彩网:Confirmation bias describes how people naturally favor information that confirms their previously existing beliefs.
• Mood bias, optimism (or pessimism) bias, and overconfidence bias all add a note of irrationality and emotion to the decision-making process.
• The 澳洲幸运5官方开奖结果体彩网:endowment effect causes people to overvalue the things they own just because they own them.
• Status quo bias is resistance to change.
• 澳洲幸运5官方开奖结果体彩网:Outcome bias assumes a future result will happen based on previous events without regarding how those past events developed.
• Reference point bias and anchoring bias are tendencies to value a thing in comparison to another thing rather than independently.
• The law of small numbers is the reliance on a too-small sample size to make a decision.
• 澳洲幸运5官方开奖结果体彩网:Mental accounting is an irrational attitude towards spending and valuing money.
• The disposition effect is the tendency to sell investments that are doing well and hang onto losers.
• Attachment bias is a blurring of judgment when one's own interests or a related person's interests are involved.
• Changing risk preference is the gambler's fatal flaw: a small risk, no matter what the outcome, creates a willingness to take on greater and greater risks.
• Media bias and Internet information bias represent uncritical acceptance of widely reported opinions and assumptions.

Example of Bias

Bias can be seen in the way people invest. For example, endowment bias can lead investors to overestimate the value of an investment simply because they bought it. If the investment loses money, they insist they're right and the market will surely correct its error. They may reinforce this belief by reviewing all the reasons it was worth what they paid, ignoring why its value fell. An investor with 澳洲幸运5官方开奖结果体彩网:implicit bias might bypass an otherwise profitable investment based on negative biases about where the company is loc🐷ated 📖or its stance on public issues.

The rational investor will review all of the positive and negative data and deciꦿde whether objectively about their investments.