What is behavioral bias in investment?

If someone tells you that they sold six stocks last week, with five making money and one incurring losses, what would you think?

Initially, you may envy his luck and the money he made.

But don't forget, maybe the money lost in one stock outweighs the money earned in five stocks.

Usually when making judgments and decisions, we tend to rely on past experiences and intuition.

After all, when a path is already laid out in front of us, why bother to open up a new one?

Shortcuts make life more convenient, but sometimes they may lead us into danger.

In investing, some shortcuts may actually lead to losses.

These risky shortcuts are behavioral biases, which include cognitive biases and emotional biases.

These deviations should catch our attention.

Let's first talk about cognitive biases.

Psychology believes that people's behavior is not determined by the events themselves, but by how people perceive these events.

However, people may experience cognitive biases, which can be further divided into information processing biases and belief perseverance biases.

Information processing bias refers to processing received information in an unreasonable manner.

For example, when faced with a lot of information daily, investors may pay excessive attention to market noise, such as daily price fluctuations and commentary.

However, making medium to long-term decisions based solely on this information is not a good investment approach.

It's like focusing only on one tree and missing the entire forest.

So what about the persistence of belief deviation?

The persistence of belief deviation refers to people tending to stick to their beliefs, even if they are irrational beliefs.

For example, some people may simply categorize others as good or bad, or make random inferences without sufficient evidence.

Such persistence of belief deviation is often difficult to change, which may lead to incorrect judgments and have negative impacts on investments.

For example, you may think you can control the investment results.

You believe that the stocks you are bullish on will definitely rise, so you heavily invest in these stocks without diversifying, which could ultimately lead to significant losses.

In fact, psychology believes that cognition can be changed, and this also applies to investments.

To become a more mature investor, we can strive to understand and change our cognitive biases, and make more rational investment decisions.

Now let's talk about emotional bias.

Emotional bias stems from emotional-driven impulses or intuition.

Investing involves returns and losses, achievements, and failures.

So for traders, it is impossible to completely avoid emotional disturbances, experienced traders also face them, but they are affected less.

We are afraid of making mistakes, afraid of losses, afraid of missing profit opportunities...

Specifically, when stock prices fluctuate, you may prematurely sell to secure profit out of fear of making mistakes again.

You may also engage in frequent trading to make up for previous losses.

On the other hand, even positive emotions can lead to negative impacts.

For example, if you are overly confident in the market, you may trade too frequently or with excessive amounts.

Your expectation of trend reversal may stem from the fear of losses.

Simply put, our emotions can drive us to make irrational investment decisions.

Compared to cognitive biases, emotional biases are harder to overcome because they originate from deep-seated needs within us.

Do not try to resist them, or you may end up in a state of excessive excitement and face worse consequences.

What we can do is identify, understand, and accept them.

Understanding their sources and mechanisms may increase our tolerance towards them.

Additionally, changing our investment environment or processes may also reduce the frequency of emotional biases occurring.

In this way, the change may have occurred.

This episode of the video ends here. Welcome everyone to interact and share in the comments section~