“Sometimes you are your own worst enemy”- Gautam Buddha
Humans are rational as well as emotional, and sometimes both of these go on a tug of war, creating confusion which path to follow. While emotions are necessary in our day to day life, sometimes they inhibit our rational thinking. Such emotional inhibitions are called biases.
When it comes to investing, biases can lead us to make irrational investment decisions.
A prime example of it is called Prospect theory, which states that as humans, our emotional response to losses is twice as strong as the same amount of gain.
There are many types of biases we suffer and its important being aware of them so that you are not carried away by them and make an irrational decision, causing losses.
Before we begin to understand each of those biases in detail, I would suggest you “must” read this book on value investing and behavioural finance written by well known investor Parag Parikh. This book will not only talk about value investing, but also discusses, in detail, how our own biases can lead to irrational decision making.
Types of Behavioural Biases:
There are many behavioural biases we suffer, but to keep this post short and useful tro most, I will be discussing the most common biases we all have: