Don’t be tempted by cash returns
How can investors overcome their negative biases and avoid selling their equity holdings in market downturns?
Among many other behavioural biases, humans suffer from recency bias and loss aversion. Both of these appear to have influenced South African investors in recent times, as poor equity returns over the past three years have sparked a move out of equities and into better-performing investments like cash. Recency bias is the tendency to overweight recent experiences when forming a view of the future. So, if the equity market has lost 15% in recent weeks, you would be inclined to believe that equities tend to lose value more often than not, and therefore you would be more likely to be wary of equity investments. Loss-aversion theory, meanwhile, holds that people’s pain from a particular loss weighs a lot more in their mind than the joy they would experience from making a similar gain. This bias against losses makes it harder for investors to weather the downturns in the more volatile equity market, and underpins a natural risk intolerance among most people. And the human urge to act inc...
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