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!
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Paul @mrwhite007 · 6mo
Guilty of both! I’m at the stage where I adjust my portfolio more times than I take a shower! 😂🤦🏼♂️ However, watch this space….it’ll soon be resolved and left to grow on its own accord!
Endowment Effect… After investing solely in $VEQT for years now, I am painfully aware of how difficult it will be for me to consider adjusting my holdings. This is both in regards to potentially new products that may be more evidence-based (example the new Avantis-CIBC All-in-One) and/or when I should rationally lower my risk profile as my human capital adjusts over time (example an 80/20 portfolio like $VGRO)…
Michael Conroy@conroy119 · 6mo
Oh yea, so many biases. I try my best to avoid it by minimizing the tinkering. Great book too! One of my favs. There has been a giant trend on Blossom of people believing they predicted this commodity cycle, and that they know how it will play out. With language like "do you see it yet?", or "look at this chart - if you dont know what its showing do your own research or you'll miss out." A lot of people are very confident and think they know how to trade and position themselves. They may or may not ne right. But a lot of self enhancement. With lots of sheep following.
Max Penders@mjpenders · 6mo
The idea of bias is one of those things that can give a really instinctive negative reaction. I think that just means it's worth looking into even harder. I definitely do have biases. I would even say I'm very susceptible to funds pitching themselves on the academic backing of their employees. One of the largest things I've been trying to improve is the mindset of "what I have is good enough, and it's not worth paying all these transaction costs to change it"
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