Investing in the stock market can be exciting, requiring you to pay close attention to the market and the sentiments of other investors. While your investments might be performing well for a certain period of time, other times you could find yourself in the red. This process is only natural for all investors, and with practice and experience, the investor learns to capitalise on their gains, and minimise losses.
However, regardless of your level of experience, you may find yourself making decisions based on certain investment biases. These cause us to act in irrational ways, throwing logic and analysis out the window. Let’s take a look at some such investment biases, and how you can beat them.
One of the biggest examples of the herd mentality bias can be seen in the recent trends surrounding NFTs. While the technology undoubtedly has a number of benefits of IPR and Copyright purposes, we find a large number of people investing in NFTs purely because others are investing in them. It's a type of FOMO, and in that fear of missing out, you could end up making some poor investment decisions.
Just because there are a lot of people investing in something, that doesn’t make it a fundamentally good investment. Instead, focus on buying and selling investments on the MO trader app based on your technical and fundamental analysis.
There exists a rule with stock market charts; If you are confused and are unable to understand a trend in a chart, zoom out. Not doing this causes us to succumb to recency bias.
In a nutshell, the recency bias causes us to assign more value to events that are closer past, than to those that have happened further off. This turns out to be a problem when you proverbially don’t zoom out of the chart and can result in you assessing a fundmentally weak stock as a good investment. Historical data of a company is essential while making mid to long term investments, and one must assign equal weightage to all events, regardless of the time period.
Our mind often works in ways that cause us to seek and identify themes and patterns in places that they might not necessarily exist. This is essentially the breeding ground of confirmation bias, which can cause us to make decisions based on signals that could be false positives.
As part of the confirmation bias, we might incorrectly identify a trend or correlation that does not exist, just because we feel like we have confirmation of a trend. Always ensure that you carry out thorough technical and fundamental analysis before you invest in a stock, and check yourself to ensure your investments are not succumbing to your confirmation bias.
Investing in the stock market can be highly rewarding, though it does require patience. In its absence, we can succumb to a number of biases. While most of us have done so in the past, the goal is to recognise these biases and check ourselves before we make any investments.