Wikipedia describes a cognitive bias as a replicable pattern in perceptual distortion, inaccurate judgment, illogical interpretation or what is broadly called irrationality. They are the result of distortions in the human mind that always lead to the same pattern of poor judgment, often triggered by a particular situation.
While there are a multitude of identified cognitive biases, a few tend to be talked about more than others when it comes to investing & trading such as:
- Anchoring: The tendency to avoid options for which missing information makes the probability of an outcome seem unknown and unknowable.
- Bandwagon effect: The tendency to do (or believe) things because many other people do (or believe) the same thing. Related to group think and herd behavior.
- Confirmation bias: The tendency to search for or interpret information in a way that confirms one’s preconceptions.
By staying aware of how these biases can creep into your views on stocks, you can hopefully continue to call things as they are when fundamentals change (and believe me they will change) instead of seeing things as you want them to be.
Related posts:
Tips for Preparing a Stock Recommendation
Stand Out by Going the Extra Mile
Know Your Audience’s Investment Time Frame
Know the 3 Key “What Counts” Factors for Your Stock Picks
Don’t Live in the Past Tips for Preparing a Stock Recommendation
Stand Out by Going the Extra Mile
Know Your Audience’s Investment Time Frame
Know the 3 Key “What Counts” Factors for Your Stock Picks
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