How to recognize and overcome behavioral biases when investing
Discover your hidden biases
Review these common behavioral biases that might be influencing your investment decisions, and ask yourself if any resonate with you.
Common behavioral biases that can influence your investment decisions
ANCHORING
Relying on an initial piece of information as the primary reason for a decision
HERD MENTALITY
Following what other investors are doing
OVERCONFIDENCE
Believing that your own judgment is more reliable than it really is
CONFIRMATION BIAS
Seeking out opinions that agree with your own
RECENCY BIAS
Placing more weight on recent events than past events to inform future outcomes
LOSS AVERSION
Being more sensitive to a loss than a gain of the same amount
ENDOWMENT EFFECT
Valuing investments you own more highly than the current market value
REPRESENTATIVENESS
Ignoring real probabilities in favor of an event or individual piece of information
These biases all stem from human nature, which means nearly every investor is susceptible to them at some point. But there are steps you can take to mitigate the potential negative effects of bias on your own investment performance.
Steps to mitigate bias in your investment performance.
1 DEVELOP A FINANCIAL PLAN: Create context for all investment decisions that follow.
2 FOLLOW A PROCESS: Ensure well-defined, repeatable actions that remove emotion from your decisions.
3 STAY THE COURSE: Stick to your plan no matter what happens in the market.
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Source: Morningstar Direct, Mind the Gap 2023.