Two Common Biases that Lead to Erroneous Investment Decisions

Forbes Contributor Mike Patton explains that the reasons behind do-it-yourself investors routinely sabotage their investment success are due to two common biases. “Two of the most powerful emotions we experience are fear and greed. When an individual invests in the stock market and stock prices decline, at some point the pain becomes too much to bear and fear begins to dominate. This investor may believe that things will only get worse and that the near term will resemble what has happened most recently. In short, they become convinced that stocks will continue to decline and decide to sell everything, thus escaping further pain. This is called the ‘recency bias’ and is quite common… The second bias is the ‘bandwagon effect.’ Many investors have a subconscious, but strong tendency to follow the crowd. If everyone is doing it, it must be right.” Hopefully Investors who manage their own portfolio can learn these two common biases and avoid making the costly mistake. (forbes.com)