List of cognitive biases to be aware off when investing.

I came across this and thought it would be useful to list some of the biases that can hinder our investment strategies.

“The first principle is that you must not fool yourself, and you are the easiest person to fool.”
Richard Feynman

Here is a list of biases I summarized from this infographic below.

  • Self-Serving Bias: price drop is due to market manipulation, but our success is due to our genius picks.
  • In-Group Favouritism: do I even need to explain this here on /stocks
  • Bandwagon Effect: ditto
  • Groupthink: ditto
  • False Consensus: We believe more people agree with us than is actually the case. This is when you fomo and end up getting wrecked
  • Curse of Knowledge: You know that most people can't beat the market and can't explain why newbies keep coming up with the same set of questions.
  • Naïve Realism: We believe that we observe objective reality and that others are irrational, uninformed, or biased.
  • Dunning-Kruger Effect: The less you know, the more confident you are. The more you know, the less confident you are. You see this with seasoned investors vs newbies all the time.
  • Google effect (aka Digital Amnesia): We tend to forget information that’s easily looked up in search engines. haha
  • Belief Bias: We judge an argument’s strength not by how strongly it supports the conclusion but by how plausible the conclusion is in our own minds. Just remember its very easy to convince yourself.
  • Declinism: We tend to romanticize the past and view the future negatively, believing that societies/institutions are, by and large, in decline. Just look at the current sentiment here when market drops.
  • Confirmation Bias: oh look this post is exactly what I was thinking it must be right
  • Falsification bias is the opposite of confirmation bias. Oh look this article must be shit because it saying something bad about (XXX) pick your favorite industry / stock .
  • Sunk Cost Fallacy (aka Escalation of Commitment): We invest more in things that have cost us something rather than altering our investments, even if we face negative outcomes. This one is by far one the most dangerous fallacy when it comes to investing.
  • Gambler’s Fallacy: We think future possibilities are affected by past events. Technical analysis anyone?
  • Framing Effect: We often draw different conclusions from the same information depending on how it’s presented. Again look at reddits comments.
  • Out-Group Homogeneity Bias: We perceive out-group members as homogeneous and our own in-groups as more diverse. Just look at how much confusion there is people wondering why half the people have different opinions.
  • Survivorship bias: We tend to focus on those things that survived a process and overlook ones that failed. Again vey dangerous when analyzing the market.
  • IKEA Effect: We place higher value on things we have partially created ourselves. Again, its easy to get obsessed over a stock you were in early on.



Leave a Reply

Your email address will not be published. Required fields are marked *