Action Bias
• We prefer action over inaction.
• As per Action Bias look active even that achieves nothing.
• According to investors the more they trade the better they’ll do, and that is completely wrong
• As an investor how can one ignore Action Bias? Please watch video for an answer.
Affect Heuristic
• We rely on mental shortcuts called heuristics.
• Effect heuristic is one of the popular heuristics, an effect is monetary judgement like positive or negative.
• Effect heuristic puts Risk & Benefits on a same thread.
• In general, we over value the returns & undervalue the risk of investments we like & vice versa. How we can avoid this? Watch a video for an answer.
• We make complex decision by consulting our feelings not our thoughts.
• Never substitute the question what do I think about this with how do I feel about this?
Ambiguity Aversion
• Risk & Ambiguity are two different things. Risk means we know the probabilities; ambiguity means we do not know the probabilities.
• If one wants to think clearly while making investment decision one should understand the difference between risk & uncertainty.
Anchoring Bias
Anchor is a valid reference point; it also influences our thinking.
• Anchors are a great tool for making estimates of the future but the problem is one must be aware of irrelevant anchors that might influence us.
• How do anchor influences investment decision? Watch a video for an answer.
Availability Bias
• Investor prefer information that’s easy to obtain & they make decisions based on this information. • Availability bias is the tendency to prefer wrong information over to no information.
• To fend off the availability bias in investment decision search for information even if its hard to obtain, mingle with people who think differently than you & time to time take a hard look at your investment mistakes & learn from that in other words examine your errors of omission.
• Don’t get lulled by easily available information even though valuable information are harder to get so dig for the valuable information.
Confirmation Bias
• Confirmation Bias is the tendency to interrupt the new information to fit our existing beliefs.
• Confirmation Bias messes up investment decision, make your investment only after you have review reverse prospective, always ask yourself what does the seller know that you don’t know.
Default Effect and Status Quo Bias
• The Default effect & Status Quo Bias reveal our strong tendency to cling our old ways even it cost us disadvantages.
• To make better investment decision change your default setting & move beyond the Status Quo
Endowment Effect
• One should always objectively value their investment.
• While investing listen to your logic and ignore your intuition
Exponential Growth
• Reinvest your investment to add substantial gain.
• When it comes to exponential growth Never rely on intuition.
• In Exponential Growth what really helps with low growth rate magic number 70.
Framing Bias
• It’s not what you say it’s how you say it, this effect is called Framing Bias.
• Framing always plays a role in each type of communication.
• Always list all the relevant factors before making any investment decision.
Halo Effect
• Halo Effect occurs when a single aspect overshadows the full picture of an investment.
• The market can be right but it also can be wrong therefore market price is an unreliable signal of a stock value.
• Judge investment by something other than current price.
• Use IDFC’s red-yellow-green signal while making investment decision.
Induction Bias
To overcome from Induction Bias never assumes that history repeat itself in a stock market in regards to investment, consider unexpected things & the last one never acts on mere opinions.
Loss Aversion Bias
• We are more sensitive to negative loss than a positive gain this effect is called Loss Aversion Bias.
• To overcome the effect of Loss Aversion one should be an investor, not a speculator, sometimes cutting a loss and move away is rational choice, don’t check your investment on a daily basis.
Neglect of Probability
• Read every investment considering the risk
• Always look at the core fundamental of an investment
• Consider Margin of Safety as one of the factors while making investment decision
• Use IDFC’s Red-Yellow-Green scale while making investment decision.
Outcome Bias
• Outcome Bias predict that investor evaluate the decision based only on the results & not on the decision-making process
• Beware of randomness.
• If one wants to invest in mutual funds always consider the history of longer time spans.
Overconfidence Bias
• Sometimes people overestimate their skills & knowledge this is called the Overconfidence Bias.
• To deal with overconfidence effect in investment decision always add extra margin of safety in decision, think & forecast for yourself, favor the pessimistic scenario.
Primacy and Recency Effect
• To shield ourselves from Primacy & Recency effect avoid evaluation based on first & last impressions, read financial history books before making any decision.
• To know more about Primary & Recency effect please watch a video.
Regression To Mean Bias
Ignoring the regression to the mean can have destructive consequences for our investments.
Self Serving Bias
• We attribute success to ourselves & failures to external factors, this is the Self-Serving bias.
• Don’t invest in securities because it makes you feel good, investing should be a non-emotional activity.
• Whenever you make investment decision write down thinking so you can analyze your decision process later.
Social Proof
• At IDFC investment are divided into three zones red, yellow & green
• Be aware of social proof, think & act of our own