Broker Check



Understanding Your Biases May Help You Avoid Costly Mistakes

| August 10, 2020

Being aware of the biases driving irrational investment behavior can provide you with some ammunition for maintaining discipline and avoiding costly mistakes.  In my experience, recency bias and loss-aversion bias are two of the most common disruptors.

Recency bias refers to the tendency for recent events to have a stronger influence on your decisions than more distant events. It convinces us that a rising market or individual stock will continue to appreciate, or that a declining market or stock is likely to keep falling. This bias often leads us to make emotionally charged decisions that could erode our earning potential by tempting us to hold a stock for too long or pull out too soon.

Loss-aversion bias describes a situation where investors feel the pain of a loss much more strongly than they feel the enjoyment of making a profit.  This behavior could cause you to hold on to a losing investment too long, with the fear of turning a paper loss into a realized loss.  It could also lead to selling an investment too early to lock in a profit.

Although these behavioral biases are present in everyone, they can be overcome by understanding the risks of market volatility and having a sound financial strategy in place.

Do you need help getting your financial strategy established or back on track? Give our team a call today.