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.
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.
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.
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.
Copyright © 2021 Methodology