“A lot of people with high IQs are terrible investors because they have got terrible temperaments” – Charlie Munger
If there is one thing which is responsible for making or losing money in the stock market, it is Behavioral Biases. Each of the below topics deserves a full chapter but lets us review them briefly.
1. Availability Bias
The tendency to overestimate the likelihood of events based on recent memory.
2. Representation
If the stock is rising, we expect it to continue rising and vice versa.
3. Endowment Effect
The tendency for people to demand much more to give up an object than they would be willing to pay to acquire it.
4. Hindsight Bias
The tendency to see past events as being predictable at the time those events happened.
5. Confirming with Society
The tendency to conform to the public.
6. Overconfidence
The tendency of excessive confident on own’s ability.
7. Loving/liking Tendency
The tendency to love the stock based on loving its product.
8. Hating Tendency
The tendency to hate the stock based on hating its product.
9. Small Sample Bias
The tendency to believe the result based on non-representative sample research.
10. Recess to Mean
The tendency to get average performance after extreme good or bad performance.
11. Loss Aversion
The tendency to take a risk in a risky situation and risk-averse in sure benefit situation.
12. Regret
The tendency to emotional pain based on the wrong choice.
13. Mental accounting
The tendency to divide the money in memory for different purposes.
14. Sunk Cost
The tendency to not see the already expensed amount on bad projects. New CEO does not see this.
15. Anchoring and adjustments
The tendency to anchor on a stated amount and adjust up or down from it.
16. Substitutes to something easy and intensity matching
The tendency of excessive confident on own’s ability.
17. A man with a hammer tendency
The tendency to see the same solution for all problems.
Some Good Reads.
- Warren Buffet predicted the fall of Sears a decade ago (Business Insiders)
- Passive as a factor (Medium)
- Investing in unknown and unknowable (Harvard.edu)
2 Replys to “Behavioral Biases and Heuristics in Investing”