Cognitive biases can lead to poor financial decisions from "summary" of PSYCHOLOGY OF MONEY. by MORGAN. HOUSEL
Cognitive biases can wreak havoc on our financial lives. They can lead us to make decisions that are not in our best interest, causing us to lose money or miss out on opportunities. One of the most common cognitive biases is overconfidence. When we are overconfident, we tend to believe that we know more than we actually do. This can lead us to take risks that we should not be taking, such as investing in risky assets or starting a business without proper research. Another cognitive bias that can impact our financial decisions is anchoring. Anchoring occurs when we rely too heavily on the first piece of information we receive when making a decision. For example, if we hear a stock is trading at $100, we may anchor on that price and be unwilling to sell even if the stock's value has plummeted. This can cause us to hold onto losing investments for far too long, hoping that they will rebound. Loss aversion is another cognitive bias that can lead to poor financial decisions. Loss aversion is the tendency for people to strongly prefer avoiding losses ...
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