1. Anchoring

Anchoring is quite a common cognitive bias witnessed among investors, which means basing investment decisions on an initial piece of information. This initial information serves as the starting point, which we adjust, to arrive at investment conclusions. Say, for instance, you bought a stock of XYZ co., in January at Rs. 100, at the end of May the stock went up to Rs. 130, then the top management changed, and by October the stock came trotting down to Rs. 90. Now, you are holding on to the stock hoping it will again rise to Rs. 130, then only you will sell to book the profits.

In this case, you may be clinging onto the anchor. Buy, sell or hold decisions must be on the back of fundamentals, and not on previous highs or lows. Don’t let perceptions or experiences, good or bad, clout your judgment ability, a past bad experience with equity doesn’t direct the future, it’s the rudiments of the product that matter in the long term.

2. Confirmation bias

Another product of extending our beliefs and preconceived notions to our decision-making process is Confirmation Bias. For instance, you are looking forward to the launch of the new Honda Civic for your next car upgrade, you have read good reviews about the car, the Sunday car shows are talking about the Civic, and all the blogs you read people have written good things about the car, etc.

All the information seems to be in the affirmative, so now you firmly believe that you have made the right decision. But have you ever thought that it is only because you are reading selective reviews and blogs? Probably you have subconsciously ignored contradictory views and negative reviews or skipped reading good things about other cars in the segment. In short, we are all ears to information that supports our beliefs, while filtering out everything that does not fit into our comfort zone. And when this tendency is extended to finances, it dilutes the investment decision-making process.

You may be looking at only that information that is in alignment with your notions while ignoring the rest. Try to look at contradictory viewpoints, and consult your financial advisor, he/she will show you the right path.

3. Loss aversion bias

The most common one, we fear the possibility of loss, and we are just not prepared to let go of our money, under any circumstance. We hold on to the poor performers because we do not want to book losses we purchase more of the same infertile stock/mutual fund to average out the cost and cover up the losses that we have made. You have to accept the fact that a bad decision was made, book losses, and move on. Our strength is tested in volatile times when we see our investments falling. It’s up to us, we can either fall prey to the bias, and sell our investment to avoid losses; or we can do what we ought to do, that avoid the noise, and hold the investment for it is for our long-term goals.

4. Mental accounting bias

Mental Accounting Bias is the tendency to mentally categorize money into different mental accounts based on their source or the basis of its intended use, and then treat the money in different categories differently. For Example, you had set aside Rs 500 note last month for buying yourself a book, but then today when you open your cupboard, you find that you have lost the note. You are sad and decide you’ll not buy the book. Normally, had you ‘not’ dedicated this note to the book, and would have lost Rs. 500 in the usual course, the book purchase might not have been affected. This is a simple case of Mental Accounting Bias. Similarly, people take investment decisions based on the mental accounts they have created. For instance, in case of a sudden inflow of money like a bonus or inheritance received, people tend to be irrational in their decisions compared to when the source is their monthly salary. Or say you have kept an FD for your vacation and at the same time you are paying massive interest on your credit card bill outstanding. Logically you should break the FD to pay the loan since you are getting 7% and paying 25%, but you don’t do so, since you have created a mental account for that money in your mind. We must understand here that money is fungible, and the value is the same irrespective of the source or the outlay. Hence, you must be careful of such mental accounts and the impact they may have on your investing decisions.

5. Familiarity bias

At times our investment decisions are based on our connection or comfort with the product we are investing in. People working in banks often purchase their employer’s stocks or banking sector stocks, we invest in stocks or sectors because we have researched a lot on this stock/sector and believe in it, and the like. Because of this bent towards our familiar options, we are restricting our investment horizon. There is a universe of investment products available out there, and we must choose the best from the lot.

6. Bandwagon

As the name suggests, we have this uncontrollable urge to order what the people at the other table are eating. We often extend the urge to our investing decisions also, we feel other people are making money because they made better choices, and we feel we are missing out on some information that they may have, it’s a typical case of FOMO (Fear of Missing Out), and it can have disastrous repercussions. Every individual is unique in terms of his/her financial standing, goals, needs, priorities, and risk appetite, so how can the investing process or products be similar? Hence, you must always be mindful that investing is not about making more money by following your neighbor, rather it’s about gratifying your unique goals and needs.

To conclude, a large number of times, we follow our emotions, and inclinations tend to influence our day-to-day decisions. Without realizing it, you might have fallen prey to biases, while in investment decision-making. They say “The one who has mastered his emotions is mightier than one who conquers a city”, it is inordinately applicable to investing, and we must always stick to the fundamentals and follow our master plan religiously. And your financial advisor is there to help you overcome these cognitive biases and to show you the mirror whenever your decisions are clouded by your emotions.