7 common investing biases you may want to steer clear of
The factors that make each investor and his/her mutual fund investing journey unique are their financial goals, risk appetites and also their biases towards investments. Your past experiences, conditioning, personalities and even family backgrounds can lead to some biases and hence, have an effect on the decisions you make around money. You may not be aware of it, but these biases often play a substantial role in the kind of investments you may or may not make. These biases can be based on non-existent or imaginary thumb rules that may or may not be valid for the current investing scenarios, and that may obstruct logical thinking.
Here are 7 such biases, that you can try to avoid-
1. Anchoring Bias
It is a bias in which, a past reference/benchmark holds a little too much value weightage in your decision making today. For example, assume that if a mutual fund scheme performed exceptionally well in a particular year due to some external market factors, sticking to that scheme for a long period hence even though it has not been performing up to the mark for a considerable number of years might be a result of anchoring bias. You are, in the end, basing your decision to that one-time benchmark and hoping for it to repeat without any logical reasoning behind it.
2. Bandwagon Bias/Herd Mentality
If you are thinking of buying gold jewellery on an auspicious occasion because everyone is buying it; then you might have the bandwagon bias . Similarly, if you invest in schemes because other investors are doing it, this bias may not be ideal for you. Each investor, their investing journeys, risk appetites and goals are different, and thus, a fund that suits one portfolio may not suit another. Basing your decisions on logic or data is more advisable.
3. Choice Supportive Bias
Do you often tend to defend your choice of gadgets, a sports player, ideologies, a flavour of ice cream or a mutual fund scheme you have invested in? Chances are, you have the choice supportive bias, which implies that you shall be biased in favour of the investment decisions you have made and it is difficult for you to look beyond your choices even if they may not have the best ones in hindsight.
4. Confirmation Bias
Confirmation bias is an inclination to sought out and consume content/information that supports our beliefs and ignore the information that contradicts your beliefs. For example, if you believe that investing in equity schemes is not worth the risk, then you may tend to focus only on the relatively higher-risk part and ignore any information about it providing you with a relatively higher reward too possible if invested wisely.
5. Outcome Bias
Outcome bias is the tendency to judge a decision by its outcome rather than what led to the decision. This bias tends to give less importance to all the events preceding the decision that led to the nature of the decision. For example, assume that if listening to your gut, you invested in a mutual fund scheme that in the end did well and helped you create wealth; this does not mean that all decisions made based on your gut will help you succeed. It might have been pure luck. But outcome bias may force you to disregard this fact. It will keep you from basing your decisions on data and facts next time.
6. Loss Aversion Bias
As the name suggests, loss aversion bias is the fear of loss. Psychologically speaking, the sadness you feel at the loss of, say, Rs 10 is more closely-felt than the happiness you feel at the gain of, say, Rs 20. It is often said that risk-aversion and loss-aversion are confused by the investors. Perhaps, it is time to re-evaluate your risk strategy by eliminating loss aversion bias.
7. Trend Chasing Bias
As an investor, it may be very tempting to invest in schemes or categories of funds that are being much spoken about, or in the news for all the good reasons. Trend chasing bias may lure you into buying schemes that may be good at a point in time but may not deserve a place in your portfolio because they are not aligned with your goals, investment horizon or risk appetite.
The biases mentioned above may affect your investment planning subconsciously, and it is advisable that you either consult your mutual fund advisor before making any investment decisions. Or, you can choose to reflect on your past investment decisions to learn if any of those were influenced by these biases; to make sure that you tread a different, unbiased path hereon.