Recently, Hubbis, a leading provider of content and online training for Asia’s Wealth Management & Private Banking Industry, published a report The High Net Worth Guide to Wealth Management in Asia 2011.
In one of the chapter, Understanding your biases, looks at the influence and impact of emotional and psychological biases on investors’ investment decision-making, including insight on some of the most common ones, and considers how investors should tackle these.
Given the volatile stock market, it is essential for investors to evaluate themselves again to prevent from the many types of psychological bias, all of which impact their approach to their investments. Below are the common biases abstracted from the report. Ask yourself if you have fallen to these traps before:
- Representativeness bias: when they see a pattern they tend to extrapolate it, rather than sticking to their original financial strategy
- Illusion of control: they feel more comfortable and competent if they think they can control something
- Prospect theory: they look at profits versus losses, rather than at their overall financial well-being
- Over-confidence: they are, in general, over-confident and readily credit their own investing abilities
- Self-attribution bias: they attribute any profits they are making to their own ability
- Availability bias: they trade attention grabbing stocks more than institutional investors trade them
- Regret aversion: the regret of omission is more significant in Asia as investors do not want to miss out on an opportunity
- Anchoring: they use past performance to drive their future strategy, effectively clinging on to a fact or figure that should have no bearing on their decision
- Framing bias: they look at a particular situation or investment at a point in time and think it is satisfactory from a certain frame of mind they have at that point
- Mental accounting: they create different accounts in their minds for different purposes, and tend to value some dollars less than others
- Disposition effect: they cannot deal with their losses rationally, which is shown by the fact that they might fall in love with a certain stock
- Momentum effect: they think a winning stock will continue to be a winner, and a losing stock will continue to be a loser