How to Avoid Biases in Investment Decision-making?


In the stock market, when we make investment decisions, there are often a bias in our mind. To improve the accuracy of investment decision-making, we must deeply understand the possible bias that may appear in this process.


The first type of bias we need to avoid is the investment bias caused by the endowment effect. This is reflected in the fact that if people own something, they are unwilling to give it up even if they know that there is something better than it. Many investors have feelings with the stocks they invest in, especially those that have made profits for them, so they are reluctant to change the shares. In addition, there is a study that found that sadness significantly increased the buying price, while disgust significantly reduced the selling price. In the stock market, if investors feel frustrated, they may buy hot stocks with higher prices more blindly; If investors feel fear and disgust, they may sell out the stock price at all costs.

Another kind of bias is the impact of sunk costs. There is a psychological experiment: if you buy a movie ticket for 50 dollars, and then watch the movie for 20 minutes, finding it a really terrible one, will you stay in the cinema? You have to know that no matter what, the money you spent will not come back. You can choose to continue the painful 2 hours, but you can also leave the cinema and do something else. Even so, most people still insist on watching movies they don't like.


Rational investment decisions should always get rid of the influence of sunk cost on existing investment, and make rational decisions based on the present. But many investors are not. A typical case is losing money and increasing positions. If a stock loses 30%, some investors will instinctively tend to increase their positions and dilute their costs. However, if the decline is caused by the deterioration of the company's fundamentals, investors should stop losses in time.

In addition, we should overcome the prejudice of confirmation. During the novel coronavirus pneumonia outbreak, many Western media published a series of reports on the ineffective anti-epidemic of the US government. What is the statement of US President Trump in public? He attacked CNN and other media as Fake News. If President Trump really thinks so, he is making the mistake of confirmation bias. People always look for information that agrees with them, and when they see information that does not agree with us, they often think that the source of information is biased. With this bias, people have a tendency to spend all the time selecting the information that is in line with the opinions they agreed with and that are beneficial to them. This desire to identify rather than refute is confirmation bias.


For example, first impressions are very important in interpersonal communication, and religious people rarely change their faith. It is not difficult for people to accept a new idea, but it is difficult to clear their inherent ideas in their minds. The same is true in investment. The idea that an investor comes into contact with first will have a profound impact on his or her investment philosophy in the future. Many investors clearly know that their investment methods are not ideal, their securities accounts are expensive, and there are many high-yield investment methods full of evidence. But they still choose to stick to the original investment strategy. This is actually because it is very difficult to change people's behavior patterns. 

Try to get rid of your old-fashioned investment methods and have a fresh look at the stock market!