4 Investing Emotional Biases to Avoid:

Budgeting / By Humbled Budget

Humbled Budget Team

With over 55 years of combine experience in the Finance/Tax Industries based in the United States, Our Team of Humbled Individuals' shares their wisdom gained through experience or technical knowledge acquired through Additional Education.

Experienced investors who have been investing for a long time know that investing is a financial activity as well as an emotional activity. This is why people with a high level of self-control are better at decision-making. Some people don’t have any control over emotional biases this usually depends on a person’s personal feelings when it comes to decision-making. Negative past experiences can hamper current decisions as it can mentally be challenging.

Table of Contents

Self Control Bias:

Self-Control Bias is a part of behavioral error called Hyperbolic Discounting. There are many flaws in hyperbolic discounting and it doesn’t let allow us to see the potential profits in the long-term. To sum up, if there are two options you can choose to investing in, the short-term or the long-term even though it may be more profitable long term our desire/greed will still push us to choose to invest in the short-term. Hind sight does not allow let us see the bigger picture long-term and creates the temptation to invest in the short-term for quick dopamine. It encourages us to invest in today rather than saving for the future which negatively affects our decision-making.

You can see self-control biases in our personal lives as well. People know that losing weight is a healthy life choice that many strive for the long-term if they choose to work hard from now, but many will choose to eat unhealthy foods despite knowing that it is harm full for their health for short term feels.

Here is how to deal with Self Control Bias:

Those who have self-control bias must control it from the roots. That means they should focus more on their savings rather than investing in the short-term.

People with self-control bias don’t have investment plans and they have the intention to make fast decisions in the hit of the moment. So making full-proof plans before making any decisions is very important.

Here is how to deal with Self Control Bias:

Those who have self-control bias must control it from the roots. That means they should focus more on their savings rather than investing in the short-term.

Overconfidence Bias:

We all heard the story of the turtle and the rabbit and we know how the rabbit lost to the turtle because of overconfidence. Overconfidence bias can be seen often in most investors just like the rabbit. It can be defined as an unregulated and unreasonable faith that any investor can predict the investment market. They believe that they have developed some kind of vision to predict the market results.

They overestimate their skills and insights to judge the market and they may think that they have access to some kind of inside information with great reasoning skills that no one can compare. To summarize, investors with Overconfidence Bias believe they are more qualified than others and their decision-making is superior compared to everyone else.

Here is how to deal with Overconfidence Bias:

When you are about to make any decisions, think of the consequences first. Think of the outcome before putting a big amount of sum in stocks such as calculating the loss you might face if your plans went in the wrong direction.

Put your attitude and overconfidence aside and listen to others (Be Humbled). Gather all the information you can find and make decisions accordingly.

Everybody makes mistakes even the most successful ones, but overconfident people won’t admit their mistakes and can’t accept failures. The key to success is knowledge and making mistakes and learning to avoid the same scenario makes you wiser.

Loss Aversion Bias:

Loss Aversion Bias is a trait in investors that holds them to invest because of losses. Investors are afraid of losing more than they gain so they mostly prefer to avoid losses rather than making equivalent profits. In other words, when we have options of avoiding the loss of $100 and making a profit of $100, investors with loss aversion bias will choose the option of avoiding the loss of $100. This leads investors to hold low-profit stocks and avoid purchasing stocks that can give them higher profits. They always invest in low-return shares to avoid losing money and they miss opportunities that can give them high returns.

Here is how to deal with Loss Aversion Bias:

To avoid Loss Aversion Bias you must overcome your fears and accept the fact that investing is risky. Even most experienced investors make mistakes and lose money it is completely normal to lose money in an investment.

The best way to avoid losses is by diversifying your investments such as investing in multiple areas with small amounts. While some of your investments may underperform your other investment assuming they are not in the same sector acts like a hedge to negate some risk.

Regret Aversion Bias:

Investors who have regret aversion bias will have a tendency not to make any decisions because of fear that their decisions will turn out to be wrong and they will develop a feeling of regression. It is an emotional bias that holds people to make decisions and this leads investors to invest in low-return stocks because there is safety involved. People with regret aversion bias also like to follow the crowd, they always try to copy the decisions of others and they feel safe when their decisions match others. Lack of self-confidence can be a reason for regret aversion bias.

Here is how to deal with Regret Aversion Bias:

Investors with regret aversion bias can diversify their investments and make small investments to minimize the risks.

It is wise to always consider investing in the long-term as a well-planned and diversified investment is less risky and offers profits in the long-term.

Let’s be honest, no one is perfect and no one wants to lose money. Anyone can develop emotional biases at any moment so it is necessary to work on yourself and overcoming your fears. Mistakes happen, even the most successful investors made mistakes so admitting your mistakes and realizing what went wrong will lead you to make better decisions’ bottom line is every emotional bias can be cured by getting better at decision-making and control your emotions (It is a mental game).