It’s easy to call out biases of others and makes us (including me), brush my ego that I could point out your biases. Makes me feel like an intellectual giant. Gives a false impression that since I know about these biases, I am immune to them.
Truth is far from it. Let me list down a few biases I found myself succumbed to in life, and in investing.
- Anchoring Bias: Often found that I get very anchored to prices I first saw or a pattern I first noticed and think it would repeat to everything else. Like I got anchored to share prices of last year same time, making it difficult for me to invest in stocks that have run-up. Impairs my ability to make decisions based on what could future for the business look like.
- Authoritative Bias: This is one of my favorites. Every time I hear that an authoritative figure has bought a stock, I automatically develop a liking for that stock without even studying it. A very recent example of this is I invested in a stock (unnamed for obvious reasons) I added to my portfolio without reading much about the business. While it is doing good but I am very clear that I succumbed to this bias not once but twice. And it’s difficult to not get seduced by this bias. Gives me great comfort to know that an investor with amazing track record is invested and he might have done his homework. If I lose money in the same stock, I will have to blame no one but me for this
- Confirmation Bias: I suffer from this bias almost every single day. Whenever I see someone, I follow on Twitter tweeting in favor of stocks I have in my portfolio or I have been wanting to add, I see it as a sign to pull the trigger. Still struggling with not getting influenced but haven’t been able to avoid getting triggered by tweets. It has come to a point where before adding any stock I look out for confirmation at my peers or Twitter or a news article before buying the stock
- Reciprocative behavior: I am wired in a way that if someone helps me even a little, I feel the urge to return the favor. While this would always help in building relations and maintaining them in the stock market this would create a problem. Especially when smart salesmen have something to sell to you. Even non-sales men would benefit if you bought the stock and ride along with them. I admit not all of them would have malicious intent but purchasing something in reciprocation of favor is definitely a recipe for disaster
- Emotional Overload: While I always knew that I was an impulsive decision-maker, it was the only past year of staying at home and spending time with myself that I realized that I need to stop making decisions impulsively. This is bad both for important decisions of life, and managing money. When you’re on an emotional high due to any reason in your personal life, making decisions would cost me heavily. I still succumb to this overload but with little less intensity than before
These are a few biases that I could clearly recognize myself suffering from. I got this idea of writing these down to be more careful about them from Guy Spier’s The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment. A phenomenal read from one of the best fund managers. I can’t recommend it enough for any serious investor. Changed my life in many ways. I would write about it in detail in my next article.
Additional good reads: