For instance, in 2021, there was a buzz around Dogecoin. This bias has been responsible for many price bubbles, which eventually get many investors burned. Investors who suffer from this bias gain comfort from holding positions that other investors also hold. Herd MentalityĪlso known as the Bandwagon effect, herd mentality bias is the tendency to copy or follow the ‘crowd’ at the expense of your own independent research and ideas. The danger of this is that personal trends or what comes to your mind at any given time are not actual market trends. For instance, if you recently watched the news about a stock that is trending, you will more likely buy it when you remember it while browsing through your trading platform. Investors that suffer from this kind of bias make decisions based on what they can easily recall, such as recent memorable news, events, or even hype. Availability HeuristicĪvailability heuristic bias is the tendency to make decisions depending on what comes to mind at any given time.
When investing, it is important to carefully consider all available important information, whether new or old. For instance, if you hold a position on a particular stock, you can give more weight to a recent positive managerial change while conveniently ignoring that the company missed its earnings call by a big margin last quarter. The belief is that the current information can influence the future more than the older information, which is generally considered useless. Recency bias is the tendency to give more weight to more recent information compared to much older information. It can also make investors take unnecessary risks because they think they ‘know what the market will do.’ Recency Bias
#Hindsight bias meaning series
For instance, after a series of positive investing outcomes, an investor may come to a conclusion that ‘he knew it all along.’ This is a very dangerous mentality that can make an investor consider investing as a very simple activity. It is also the belief that negative outcomes are the result of events that cannot be predicted. Hindsight bias is the tendency to believe that your past positive outcomes were a result of your ability to understand and predict what the market will do. It is, therefore, very important to take serious consideration of both positive and negative views when investing in any asset.
This can be very dangerous in investing and can lead to clinging on to losing positions. For instance, if you are bullish about a stock, you will seek opinions and articles that reinforce your bullish bias and conveniently avoid all other information that suggests the underlying stock may be in bearish mode. It is also the tendency to avoid any inconvenient information. When it comes to the confirmation bias definition, it is the natural human tendency to look for convenient information to support your beliefs or conclusions. Cognitive Biases List & Cognitive Bias Examples Confirmation Bias Definition + Examples
#Hindsight bias meaning how to
It is, therefore, important to be aware of cognitive biases and learn how to control your innate human brain so that it does not work against you in the market. Investing is a highly psychological activity because of the emotional attachment humans have with money.
This is cognitive bias at work.įor instance, an investor may interpret new market information based on what they believe in, curve-fitting it to match what they expected. But humans already have their own existing belief system, which guides their overall decision-making. Investing is an activity that almost always boils down to making decisions.
#Hindsight bias meaning free
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