A cognitive bias refers to a systematic error in thinking that affects the decisions and judgments made by investors. These biases can lead to irrational and suboptimal investment decisions, and can result in a deviation from rational decision making. Some common examples of cognitive biases in investing include:
Confirmation Bias: Refers to the tendency to seek out information that supports one's beliefs and ignore information that contradicts them.
Anchoring Bias: Refers to the tendency to rely too heavily on the first piece of information encountered when making decisions.
Herding Bias: Refers to the tendency to follow the opinions and actions of others, rather than relying on independent analysis.
Overconfidence Bias: Refers to the belief that one's investment decisions are better and more accurate than they actually are.
Framing Effect: Refers to the influence that the way information is presented can have on a person's decision making.
Hindsight Bias: Refers to the tendency to believe, after an event has occurred, that one would have predicted or expected the outcome.
These biases can be detrimental to successful investing and it is important to be aware of them and to take steps to avoid them in order to make rational investment decisions.
