I recently read an article describing the five biases investors display, with 98% of us displaying at least one of the five. So, let's run through them one at a time.
“Anchoring”
What it is: Fixating on a specific reference point, like the price paid for an investment or market index level and basing decisions around that one number.
How it affects investors:
Can cause investors to overvalue, or undervalue, asset prices or market performance based on an arbitrary number drawn from experience.
“Loss Aversion”
What it is: Feeling losses much more intensely than feeling the reward from an equivalent gain.
How it affects investors:
By prioritising the avoidance of short-term losses over long-term gains, investors may put the success of their long-term goals in jeopardy.
“Recency”
What it is: Placing too much emphasis on experiences that are freshest in one’s memory even if they’re not the most relevant or reliable.
How it affects investors: Believing that short-term trends will continue may lead investors to ignore new information and be slow to react to changes in investment markets. “Familiarity”
What it is: Preferring to invest in what is familiar. – especially from domestic markets. For instance, the average Canadian has 92% of their wealth in Canada.*
How it affects investors: Leads to concentrated portfolios that hold only the most familiar investments – especially from domestic markets. This can increase portfolio risk and lead to a bumpier investment experience.
“Confirmation”
What it is: Seeking, or accepting, only information that supports what one already believes.
How it affects investors: By ignoring information that doesn’t support one’s decisions, an investor can form unrealistic expectations that can lead to portfolio concentration and increased risk.
