Investing Psychology 101

Anchoring Bias:

It is a cognitive bias where an individual depends too heavily on an initial piece of information offered when making decisions.

Anchoring occurs when, during decision making, an individual depends on an initial piece of information to make subsequent judgments (Source: Wikipedia)

(Source: Practical Psychology)

Confirmation Bias:

Confirmation bias is the tendency to search for, interpret, favor, and recall information in a way that affirms one’s prior beliefs or hypotheses.

Also read: 5 Psychology Traps that Investors Need to Avoid

Loss aversion

Loss aversion refers to people’s tendency to prefer avoiding losses to acquiring equivalent gains: it is better to not lose $5 than to find $5.

Investing Psychology: Roller-coaster of emotions

Endowment effect

An emotional bias that causes individuals to value an owned object higher, often irrationally, than its market value.

Herd Mentality:

Herd mentality, mob mentality or herding , describes how people can be influenced by their peers to adopt certain behaviours on a largely emotional, rather than rational, basis.

Herding is one of the biggest reason why people lose money while investing. Judging “collective” behaviour never do any good when it comes to making an important decision about investments. Most naturally, following what majority of people has chosen is always a tempting and “safe” option to go for. However, without foreseeing the background, one can’t be sure of any important decision.

The first golden rule of investing is to avoid herd mentality!