Finance 1. Confirmation bias Con rmation bias is the tendency to seek out and give more credence to information that con rms what we already believe, and ignore or discount information that contradicts or calls into question those beliefs. One common (and well-documented) example is for television viewers to prefer news that echoes their own political views, and ip the channel whenever they encounter stations that highlight di erent or competing opinions. In the investment world, con rmation bias is an all-toocommon pitfall that can be a major cause of investment errors. Instead of considering an investment decision from all angles, investors become overcon dent and point to data that simply a rms decisions which they’ve already made, while ignoring data and other information that contradicts their conclusion or hypothesis. How to protect yourself –Get into the habit of seeking out second (or third) opinions whenever you’re formulating an investment thesis. Ask yourself: what have you assumed about this investment? What are you overlooking? Force yourself to consider other points of view. Remember: it’s much more important to ask yourself why you’re wrong than why you’re right. 2. Information bias A generation ago, investment information was di cult to come by. Sure, companies published their quarterly reports. And yes, there were pundits and analysts in newspapers and on television o ering their opinions about the economy and the stock markets. But you had to knowwhere to look for it, and pore through the nancial pages to nd the information and insights that you valued. Today, it’s di erent. With the advent of the internet, economic data, stock prices and company data are available everywhere, 24/7/365. And this has given rise to a particular kind of bias: the assumption that all information is relevant and valuable, and must be considered and analyzed before making any investment decision. Rather than ltering information, we pay attention toeverything − particularly short-termmarket movements − and use it to in uence our long-termdecisions. O en to our detriment. How to protect yourself − if you’re looking to become a superior investor, you need to develop your ability to lter. is is particularly important with daily share-price data and ‘up to the minute’ company news. Create a hierarchy by which to evaluate incoming information: pay close attention to analysis, consider opinions and be sceptical about ‘stories’ and anecdotes. 3. Loss aversion Let’s face it: most of us don’t like to admit it when we’re wrong. at’s especially true when it comes to nancial decisions. In fact, study a er study suggests that people feel the pain of a nancial loss much more acutely than they feel the joy of a nancial gain. Instead of admitting we were wrong, we lie to ourselves. Needless to say, such behaviour is highly irrational and can lead to very poor investment decisions: instead of limiting our losses by selling, we hang on to losing positions in the hope of one day making our money back. Sometimes we throw good money a er bad, doubling down on losers even though the fundamentals of an investment have deteriorated. By doing so, we incur a tremendous opportunity cost: instead of redeploying funds to something that could be making money for us, we keep them in an investment that does the opposite, just to save our pride. How to protect yourself –establish rational selling criteria based on your personal risk tolerance before you commit to any investment. Set a baseline for how much you’re willing to see an investment decrease in value before you sell. Maintaining a strict sell-side discipline takes the emotion out of losses, and prevents you from becoming attached to losing positions. CSANews | FALL 2019 | 33
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