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.
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