Impact of behavioural biases on investment decisions

[ciel]

“The investor’s chief problem – and even his worst enemy – is likely to be himself.”
~ Benjamin Graham

Money and emotions are linked together. According to JP Morgan’s report, behaviour is the single most dominant factor in investor returns. Most individual investors — and even professional ones — will eventually underperform the market, due to irrational behavior

People are only human, and so is their financial decision-making.

It would be nice if investors and markets moved solely on the basis of fundamentals: and economic and financial analysis of businesses. But at times, investors appear to lack self-control, act irrational, and make decisions based more on personal biases than facts.

Behavioural Finance is a relatively new area of study looking at the relationship between behavioural psychology and finance, and seeks to understand the driving forces behind irrational financial decisions.

Why behavioral finance matters?
According to traditional finance theories, humans are “rational” and make logical decisions. This implies they analyse every aspect and make informed decisions. Behavioural finance argues that people base their investment decisions on emotions and biases, which goes against traditional finance theory.

.Behavioral finance helps to explain the difference between expectations of efficient, rational investor behavior and actual behavior. So, you see, being aware of behavioral investing, your own and others, can help you(investors) save money and look more carefully before leaping into a move.

Therefore, I am conducting a research to study the impact of behavioural biases on investment decisions for my college project . This study would help investors to understand market sentiments. reflect on their actions and take decisions accordingly. It would be really appreciated if you fill the questionnaire given

 

[malachy]

@ciel This is a really interesting area - so well done for looking at this.

For a whole lot of reasons going back to the cave-person times, humans have developed behavioural biases that in turn impact on us when we are doing things like investing. For example, humans are by nature way over-confident about their skills, which was actually a benefit back in the day when you were faced with tasks like fighting off sabre-toothed tigers etc.

Also we do odd stuff, like thinking we see patterns, where in fact they don't exist. This, combined with our over confidence, is why we happily do stupid things go and gamble against the casino.

Some of the behavioural things that are worth looking at in terms of finance and investing include:

• Over confidence – We are typically more confident about
  things than we should be.
• Heuristics – We do not make decisions based on all
  available information, we take short cuts.
• Satisfice – We settle for a solutions that satisfies the
  minimum criteria.
• Anchoring – When solving a problem, we fail to adjust
  fully to new information. We often frame our answer based on information we are given. This links to things like the influence of past performance, or information we read about something.
• Frame dependence – Our response to a problem is
  dependent or influenced by how it is framed. Get-evenitis
  is a form of this.

Good luck with this. It is a great area to study.

 

[ciel]

@malachy Totally agreed! Learned about many irrational behaviour i myself took as an investors and getting more and more convinced to invest in index haha.

I covered anchoring bias and overconfidence bias in the research! (along with loss aversion bias and herding bias)

 

[angeleone]

@ciel I took the survey and thought it was interesting also.

One thing I would have liked is a bit more detail into some questions e.g. if you are asking to we would hold, buy-more or sell if a stock went down over time - have the fundamentals changed? If so, that would change my decision. As I see myself as a value investor I would buy more at a dip as long as the intrinsic value hasn't decreased since my initial purchase.

 

[ciel]

@angeleone No, fundamentals haven't changed.

 

[bmh3d]

@ciel Interesting study! And a subject I’ve often theorised about. Primarily I’m in crypto rather than shares but answered according to my investment decisions.

 

[ciel]

@bmh3d Thanks!

 

[laura888]

@ciel One piece of feedback, this survey seems to make the assumption that the investor's strategy is to buy individual stocks, it's a little difficult to answer when the investor's strategy is to not stock pick and simply buy the market (via index/ETF funds).

All the best with your project.

 

[ciel]

@laura888 Yes, then there's no behavioural bias involved. Most of the questions and this survey is not aimed towards index buyers. But even though, this exists some bias in investors who take some decisions without thinking much.

If one is just invested in index funds without giving a second thought, they have overcome this bias and performing well in market. Which of course, are not the target of this survey

 

[middy]

@laura888 That’s what I came on here to say. The best investors don’t fiddle with individual stocks a lot, they invest in ETFs, own businesses and perhaps venture funding. Your survey seems to be targeted at the boy racers of investment.

 

[garrettholliman2001]

@ciel interesting, i was "strongly disagree" on almost every one that had that as an answer

 

[ciel]

@garrettholliman2001 And you my friend have very good control over emotions in investing.

 

[bmh3d]

@ciel Interesting study! And a subject I’ve often theorised about. Primarily I’m qin crypto rather than shares but answered according to my investment decisions.

 

[ciel]

@bmh3d

 

[zahrajoi]

@ciel I took the survey and it is difficult to answer some of the 'buy/sell/hold' questions because context matters. A stock going down 20% happens during, for example, the start of a global pandemic. Then they shot back up 20%.

It doesn't have to be a pandemic but there are reasons for price movements, a stock rising or falling x% isn't the only thing I look at to determine if its a buy/sell/hold.

 

[leiner]

@ciel Kind of like when a few coincidence's happen and people plot a conspiracy theory