There are five typical behavioural biases when making financial decisions. They include;
The overconfident trait is developed when we make an investment in say shares or property and these shares or property increase in value by more than we anticipated. We did nothing other than buy the investment. We feel very confident, so we buy more of that same type of investment, regardless of market changes in the meantime.
2. Loss aversion.
An example of the loss aversion trait is if we bought shares or property at the top of their investment cycle. After our purchase the shares or property decline in value. We decide we are not investing in that type of investment again. That is, once bitten twice shy.
3. Invest in a story.
This is where a company that we have invested in announces a new development or major breakthrough. This is no doubt an opportunity for the company, but this new development has not been implemented yet. This is common with Research and Development companies and Mining Exploration companies. The company highlights the opportunities this development will create but the implementation process has not begun. We conclude that the share price will continue to rise based on the announcement. This is not always the case. Remember the dot com businesses their share prices were based on financial projections not actual achieved earnings.
4. Go with the flow.
Everyone is buying property, so we should buy property too.
5. Risk takers.
We want to make money. Our cash is only earning about 1% or 2% per annum. There is no point leaving it in a bank account. We may as well invest it in shares, managed funds, hybrids, ETF’s, anything but cash.
Our personality traits have a major impact on our investment decisions. Are we anxious or confident? Organised or disorganised? Deliberate or impulsive? Conservative or innovative?
As investors we can be our own worst enemy. It pays to seek out a mentor or adviser who you respect, one that does not concur with all your decisions, one that has a different behavioural bias to yourself.
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The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.