The Top 2 Worst Investor Bias And How To Solve Them

Since I’m eight, I’ve always been passionate by numbers. When I discover the world of finance, I knew exactly what I wanted to do in life: work around the financial market. I guess that one thing that captivates me is about how the stock market evolves over time. When you are at school, they teach us how the market is efficient and how it’s all a numbers game. Then, you get into the real life and you realize the market is driven by emotion. The worst part is that today, individual investors are not important enough to influence the market in a significant manner. The reality is that professional portfolio manager can get emotional too. As today’s market doesn’t seem to stop reaching new high each month I feel more investment bias comes into play. We now tend to “rationalize” our bias and find a reason why the stock market will crash or will continue to rise for another five years. In both cases, it seems that not much fact are put to work. We all know about common investor bias but we tend to forget about them when things go too well… or too bad. I decided to revisit the worst 2 investment bias in my opinion and found solutions to get around them.

#1 Confirmation Bias

This is a very behavioral bias that applies in all sphere of your life. The confirmation bias is the tendency of looking for information or people confirming what you already believe.

“Confirmation bias, also called confirmatory bias or myside bias, is the tendency to search for, interpret, favor, and recall information in a way that confirms one’s preexisting beliefs or hypotheses.” – Wikipedia

This totally makes sense. You would not hangout with people always telling you that you are wrong. Hanging out with people having the same mentality, beliefs will reinforce yours and makes you feel better. I rarely saw a vegetarian hanging out with several intense steakhouse fans.

The same bias happens all the time in the investing world. If an investor is convinced the market is going to crash, the only news he will read or give importance to are the one saying exactly the same thing. The financial market is a widely discussed topic across the internet and the media. For example, if you think Wal-Mart (WMT) is going to beat Amazon (AMZN), you will most likely find bloggers and analysts telling you that WMT is a strong dividend aristocrat and you will ignore my article on the topic.