⚠️ Do You Know Your Biases? ⚠️
Behavioral finance studies have found that we all exhibit cognitive and emotional biases of varying degrees. There are more than 24 biases we could display.
We need to analyze ourself and recognize which are affecting us personally and account for them as we build our financial plan with our personal risk profile in mind.
it is impossible to eliminate biases and our emotions around investing and money. But we can understand how they may impact the decisions we have made and are making currently. Studies have shown biases impact the risks we take or do not take, for good and bad.
I'll share two biases I have noticed often on Blossom that are not emotional but COGNITIVE ones.
Illusion of control bias
this bias happens when investors believe that they can control or at least influence investment outcomes ... when, as studies show, they cannot. These investors believe that the best way to manage a portfolio is to .. constantly adjust it. for example, high frequency traders accept high levels of risk and believe that they have more control over the outcome of their investments than they actually do because they are pulling the trigger on each decision, a buy and sell. 🚀 📉 📈
Self Enhancing Bias
this bias refers to the tendency we have to ascribe our successes to our own innate talents and skills and intelligence and to blame failures on outside influences or more commonly, to not acknowledge them at all. For example, you buy a stock and it goes way up in price. We believe that it went up not because of external things like economic conditions, competitor failures, market euphoria, product and service demand (the most likely reasons for massive price movements) but on our own Investing skill and foresight. 🤓
Behavioral finance is a massive topic. A nice and easy read to get into the topic is 'the Psychology of Money' by Morgan Housel.
Do you recognize any biases in yourself? let's learn together!
