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Behavioral biases can cloud judgement from "summary" of A Random Walk Down Wall Street by Burton Gordon Malkiel
Investors are only human, susceptible to a range of psychological biases that can lead them astray. These biases can cloud judgement, distorting reality and causing individuals to make irrational decisions when it comes to investing their hard-earned money. One of the most common behavioral biases is overconfidence, where investors believe they possess superior skill or insight compared to others in the market. This can lead to excessive trading, higher transaction costs, and ultimately, lower returns. Another prevalent bias is anchoring, where investors fixate on a specific piece of information (such as the price they paid for a stock) and use it as a reference point for future decisions. This can prevent investors from selling a losing investment, hoping it will "bounce back" to their original purchase price. Similarly, loss aversion causes investors to fear losses more than they value gains, leading them to hold onto losing investments for too long in the hopes of breaking even. Herding is yet another common bias, where investors follow the crowd rather than conducting their own research and analysis. This can lead to asset bubbles and market inefficiencies as investors pile into popular investments without fully understanding the risks involved. Additionally, confirmation bias causes investors to seek out information that confirms their existing beliefs, while ignoring or dismissing contradictory evidence. All of these biases can have a detrimental impact on investment decisions, leading to poor performance and unnecessary risk-taking. By being aware of these behavioral tendencies, investors can strive to make more rational and informed decisions when it comes to managing their portfolios. It is important to remain disciplined, objective, and focused on long-term goals, rather than being swayed by emotional impulses or the latest market trends. In the fast-paced world of investing, it pays to think before you act, and to always question your assumptions before making a decision.
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