Behavioural Finance

Biases (part 2)

1

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.

2

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.

3

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.

4

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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