Behavioural Finance

Biases (part 1)

1

Bias refers to the thoughts and feelings that investors have that impact their investments. A key bias is loss aversion, which refers to the preference of investors to avoid losses instead of making gains. 

2

Research has shown that losses are twice as impactful psychologically as making a gain. Therefore, this influences investors to make choices that are less risky, limiting the upside potential of the investment.

3

Another key bias is confirmation bias, which suggests that investors seek out information that supports their original thoughts about an investment. They will avoid information that contradicts their view.

4

Confirmation bias is problematic as investors do not have the full perspective of the situation that a company is in, making unbalanced investment decisions. This can lead to unnecessary losses.

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