How does my mind affect my investments? The 12 cognitive biases

In all rulings What we drink throughout the day are there certain behavior patterns than They make us irrational, and let me tell you that the decisions we make when it comes to invest they are not safe from these irrationalities.

Los psychological biases they play a fundamental role in the world of investments, emotions, prejudices and social factors are some of the elements present when we drink financial decisions.

First of all, do you already know what a psychological bias or cognitive bias is?

In the past, people tended to think that people were rational beings, so all our decisions were analyzed and controlled. But the truth is that reality could not be further from theory, and this is what the psychologist put it Daniel Kanheman, who concluded that people were not acting the way that was thought from an economic point of view.

Contrary to what was traditionally thought, the vast majority of the decisions we make are through intuitive and automatic processes, rather than analytical processes.

Therefore, we could define the cognitive biases such as the tendency to think in a certain way that can lead us to inaccurate or irrational judgments.

What cognitive biases affect me when it comes to investing?

1. Sunken Cost Fallacy

This is the fear of getting out of an investment that isn't working, so we get stuck in that investment.

Have you ever heard it? ”It's just that I put in €10,000, I can't get out now and lose 35%” This behavior sounds familiar to you, doesn't it?

2. Predisposition to optimism

This bias refers to the tendency of certain people to be optimistic, and although sometimes seeing the good side of things is an advantage, this cannot block our ability to analyze and gather information.

So we must base our decisions on data to be closer to realism, and not so much to optimism.

3. Status Quo

We encounter this bias when we tend to think that everything will remain the same as in the scenario we are in, and we invest based on the current situation, without thinking that anything will change. But as we already know, the economy is cyclical, changeable and consequent to many changes in society.

4. Loss aversion

This cognitive bias makes us prefer to avoid loss rather than gain. That is, if we give a person the choice between receiving 50 dollars or avoiding losing 50 dollars, the most likely thing is that this person will choose the second option.

This bias involves behaviors such as taking more risks to avoid a loss than to secure a gain. Or even that it's harder for us to accept a loss than a gain.

5. Hyperbolic discount

This bias is based on a phenomenon, in which investors prefer to receive a lower return but at an earlier period of time, than to receive a higher return but later in time.

Therefore, this bias is very present in financial decisions made in the long term, since it limits and clouds us with much smaller benefits, but closer in time.

6. Social proof

This bias can be found in many situations in our social life, it is based on the fact that people tend to focus on the behavior of others and assume it as correct behavior. Many times without even stopping and analyzing if the behavior is really correct or not.

So we would have to listen to our wise mothers when they said”If the others jump off a bridge do you too?”.

7. Halo effect

This bias is based on people's tendency to judge others based on the general impression we have about an individual. And believe it or not, in the world of finance and investment, exactly the same thing happens, since we can value a company based on a single piece of data or based on the image we have of it.

8. Authority Bias

This bias makes us sometimes surrealistically rely on the advice or opinions of figures to whom we provide authority. A great example of this bias are all the investment gurus or influencers who give their opinions on social networks and beginning investors follow them with blind faith, since they consider them a guide to becoming “rich”.

9. Anchor bias

This bias creates a tendency for us to trust the first piece of information we receive about something, and based on that first piece of information (anchor) we make our decisions.

For example, in the investment world, you can hear about the great results of a company, and keep that fact when it comes to investing in it, but the truth is that perhaps the sector is in decline, or the company cannot compete in other aspects. So we would be wrong to rely only on the first piece of information we know.

10. Confirmation bias

This bias occurs when people tend to fixate on information that confirms our beliefs or previous information.

This type of bias is very present when an investor is already close to investing in a company, and is only looking for information that supports their decision, not information that could provide negative connotations that would affect their decision.

11. Illusion of control

It is the tendency to overestimate the control we have over certain events, which usually leads people to take more risks, since they believe they can control the negative consequences of their actions.

We will have heard it hundreds of times”X company is going up“,”The bag is going to fall“,”This company is going to take off“, and many others. And as you may have noticed, none of these statements have a solid basis.

12. Overconfidence

Similar to the previous example, this bias leads us to excessive self-evaluation, which can lead to the conclusion that we think we know more than we really know in any subject. And specifically, in terms of investment, this is bad, since overconfidence can lead us to assume certain risks or dangers that we would not otherwise assume.

Solutions

Right now you'll be thinking:”Yes, yes, all this is very interesting, but don't give me problems, give me solutions”. Don't worry, you already know that at Reental we are always willing to give you solutions, not just in safe real estate investment.

1. Financial education

From a young age, we always attach great importance to education, so why not do it when we grow up too? With proper financial education, we will avoid falling prey to some of the cognitive biases we have mentioned, and thus make more correct decisions.

2. Information analysis

As you may have seen in several of the biases presented, lack of analysis is one of the factors that feed psychological biases. So don't let your mind force you to make rash decisions, not at least until you have all the information you need to make it.

3. Control your emotions

During our lives, we are also prey to our emotions, which have a direct and impartial effect on our decisions. For some decisions in your life, emotions can have serious consequences, but when it comes to economic decisions... We recommend that you always consult your decisions with your pillow, and when you have clear ideas to decide, always do so with your emotions under control.

With these “tips” you shouldn't have any problems when it comes to investing, but if you still have questions, check out our properties. Thanks to Reental, you can invest in the real estate sector safely, and without letting any bias stand between you and your investments.

Let Reental eliminate all your barriers and enjoy investing in real estate.

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Welcome to the new way of doing finance, welcome to Reental.