4 Emotional Biases to Avoid

Emotions can get in the way of investing, leading to bad decisions and poor returns. Here are four emotional biases to avoid 

Christopher Greiner, CFA 11 March, 2021 | 9:14AM

bias

Stock market investors should act rationally, meaning they should make economically rational and informed decisions free of human biases, emotions, and feelings. Yet all too often investors find themselves making suboptimal decision, partly due to emotional biases.

Why is that a problem? Because for most investors, irrational decision-making eventually leads to investment losses. Here are four emotional biases you should be aware of and how you can reduce their influences on your decision-making.

Loss-Aversion Bias

Research has shown that people find losses more pain to bear than they find gains enjoyable to experience. So-called loss aversion is when we take measures to avoid feeling the pain of a loss. This can lead you to hold on to losers in the hope they will recover, because you desperately want to break even. Or you might sell too early in fear of losing your paper profit.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Christopher Greiner, CFA  Christopher Greiner is a data journalist at Morningstar Norway

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