Is your investment plan stuck in the pitfalls of cognitive bias?
Investors often react to events on an ad hoc basis, leading to overly risky purchases or sales
While we may think we are rational beings when it comes to important decisions such as investments, the reality is that we are subject to emotions and, as such, prone to biases that lead to systematic errors. Understanding and responding to cognitive biases has become a much-studied field, called behavioural finance, that draws on the field of behavioural psychology. Investors often end up reacting to events on an ad hoc basis, rather than taking decisions based on a portfolio decision-making framework, leading to overly risky purchases or sales. While there is much literature on this topic, a good synopsis of these comes from Charlie Munger of Berkshire Hathaway. In 1995, Munger gave a speech to Harvard University about 25 cognitive (or behavioural) biases that cause us to make misjudgments. It’s a must-watch video for anyone interested in the psychology of investment and how, by being aware of our cognitive biases, we can avoid their pitfalls. In this article we are not going into...
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