Know How Your Biases Affect Your Investment Decisions

August 14th 2018

In order to meet long-term financial goals, right and timely decision making is extremely important. Investors need to lay out their goals and take steps that will help them achieve the same. Analysts believe that a lot of decision making results from mental shortcuts and how we think. Investing has always been considered logical, but emotional biases tend to impact the financial decisions of the investors.So let the analytical brain do the talking and make decisions, which will not lead you into a trap.

Biases that could impact your investment decisions

Discussed below are five behavioral biases that may adversely affect your finances:

  • Anchoring

The concept of anchoring is applicable to one and all. It plays a significant role in investment matters where it talks about the tendency of an investor to stick to his/her thoughts up to a certain point. For example, you learned about a good stock when its price was INR 800 and if the same stock falls to INR 500, you will consider buying it because your thoughts are stuck at 800. Personal financial planning should be free from anchoring;only then will you be able to park your funds in the right instruments.

  • Herd behavior

Fund managers have seen this behavior a lot amongst investors. If investors see another group of investors actively investing in a particular fund, they tend to follow. This behavior is driven by the thought that if a large number of investors are investing in a stock, the returns must be relatively high. For example, if some investors are purchasing a scheme based on good mutual fund returns, there will be a large number of investors following their footstep. This may be absolutely wrong and may even put them in a trap.

  • Loss aversion

Every investor strives to reduce losses to a minimum. If an investment is made in a number of stocks and one performs well while another does not, the investor will sell the one which is performing well and hold the one  which is not. It is important to keep in mind that book profit and book losses are the only real profit and loss.Based on the same, the decision to hold or sell should be taken and not solely on notional profit.

  • Overconfidence bias

Many investors overestimate their investing skills and make decisions based on the same. This is especially true for investors who have been in the market for long. They consider themselves pro at making decisions and sometimes end up making the wrong moves, right when the market opens. It is important to revisit the portfolio and consider the performance of every stock purchased in the past. Else, long-term investment decisions based on overconfidence will only lead to incorrect and irrational choices.

  • Mental accounting

Investors have a habit of associating money received from different sources differently. For instance, money inherited from ancestors is treated differently from the money earned as a business income. Often people tend to have emotional ties with the former and are hesitant in spending or investing it. This is irrational and will lead to incorrect decisions. You need to understand the importance of compounding of interest. With every investment, you need to know how the returns are calculated and how the portfolio will be valued. The tendency to divide your money into subjective criteria leads to inefficient decision making.
You, as an investor, should keep away from biases and not let that impact your investment decisions. Consider the situation rationally and make a decision that will make sense in the long run. In order to achieve long-term investment goals, build a plan, study the terms and conditions of an investment option, and invest only when it suits your risk appetite. Remember that a higher mutual fund return does not always have to lead you towards a higher risk.At Angel Bee, you may make unbiased and rational investment decisions using the Angel Bee mobile application. Apart from being user-friendly, the main feature of the app is the ARQ investment engine, which functions on algorithms and quants. Free of any human intervention, the app will help you make the right decisions and grow your funds.So download it today and take the right steps towards an unbiased personal financial planning.

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