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23 Common Investing Biases: which one is destroying your portfolio?
Posted By Ron On June 29, 2012 @ 8:00 AM In Investing | Comments Disabled
A heuristic approach is usually a good thing. We tend to lean a lot more when our learning is hands on. But many times such an approach can lead us to a biased approach because we’re relying solely on one person’s experience (our own). It reminds me of a verse in the book of Proverbs that says there is wisdom in a multitude of counselors.
The same can be said about investing. When we rely only on one person’s experience and expertise, we can fall victim to either their or our mental shortcuts which can then lead to systematic mistakes. Then two problems emerge:
We’re all biased to some degree. That’s inevitable. But biases can be reduced (though never fully eliminated) by getting a second or third opinion on which course to take … especially when it comes to investing our hard earned money.
Biases will cost you money. They can cause you to avoid risk in one situation (selling a winning investment too soon to “lock” in your gains) or expose you to too much risk (holding on to a losing investment hoping it will “come back”). There are times that selling your winners and holding on to your losers IS a good idea but it’s an even better idea to allow an unbiased third party such as a financial advisor  to take a peek an your investing strategies so you don’t let your emotions bias your decisions.
Have you noticed any of these types of biases in your thinking or your investing habits?
While it’s easy to see these biases at work in others, recognizing your own biases is much more difficult … and important. I’m sure if you think about some of the bad decisions you’ve made in the past, you’re likely to discover one of the biases affected your judgment in some way. I know I can.
By understanding that these biases exist in your own decision making process will ultimately help you control and overcome them. Print out this list and keep it somewhere so that when you slow down and think about your next decision, you’ll know what to look out for.
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