Behavioural Finance

Biases (part 2)

Another key bias is hindsight bias, which occurs when an investor believes that a past event was obvious and completely predictable, even though it was totally random and impossible to predict. 

Hindsight bias is problematic because it can cause an investor to try and explain why an event happened, even though it was unpredictable. They may then use this theory as a basis to make future investments. 

Finally, there are a number of cognitive biases that influence the behaviour of investors. The bandwagon effect is where investors make a decision because they believe that lots of other people did the same. 

Negativity bias is where investors pay more attention to negative information. Whereas, wishful thinking bias is where investors make decisions based on what they hope will happen, rather than reality.  

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