Overconfidence, excessive optimism, self-attribution, and loss aversion often lead investors astray. All of these factors lead to irrational rather than well-considered investments.
Many investors believe that their methods are examples of sound, scientific reasoning and therefore should be used for investment decisions. They are surprised to learn that occasionally they are emotional, not logical.
Here are some examples of behavioral biases that affect financial decisions in the wrong way:
Self-attribution bias: Believing that good investment outcomes are the result of skill, and undesirable results are caused by bad luck.
Confirmation bias: Paying close attention to information that confirms a finance or investment belief and ignoring any information that contradicts it.
Representative bias: Believing that two things or events are more closely correlated than they really are.
Framing bias: Reacting to a particular finance opportunity based on how nicely it is presented.
Anchoring bias: Letting the first price or number encountered to overly influence your opinion.
Loss aversion: Being so fearful of losses that you focus on trying to avoid a loss more so than on making gains.