87. Behavioral Biases of Individuals Flashcards
Cognitive errors
- From faulty reasoning / irrationality
- Can be reduced by increased awareness, better training, more info
Emotional bias
- From feelings, impulse, intuition
[Cognitive] Belief Perseverance
Irrational reluctance to change prior conclusions / decisions
Cognitive dissonance
- Holding conflicting beliefs
- Income of info that conflicts with current belief
Conservatism bias
When market fails to adjust view with new information
Confirmation bias
Only intaking information that supports previous judgement whilst disregarding others
Representativeness bias
Certain characteristics are used to put investment in a category - individuals believe it will then carry characteristics of that category
[Representativeness] Base-rate neglect
Analyzing an individual member without looking at % of commoness of that member within population
[Representativeness] Sample-size neglect
Making classification based on small / unrealistic sample
Illusion of Control Bias
Market participants believe they can control outcomes when they cannot
Hindsight bias
Selective memory of past events and individual seeing things as more predictable than they are
[Cognitive] Information-Processing Bias
More related to info processing than decision making
Anchoring and adjustment bias
Basing expectations on a prior number
Mental accounting bias
Viewing money in different accounts different when making decisions
ex) Investing bonus money into risky stocks because they perceive it to be less critical
Framing bias
Decisions affected by the way in which the question is framed
Availability bias
Putting undue emphasis on information that is available and easy
[Emotional] Loss-aversion bias
Feeling more pain from loss than pleasure from equal gain
[Emotional] Overconfidence bias
Overstimation of their own intuitive ability or reasoning
[Emotional] Self-control bias
Individuals lack self-discipline and favor short-term satisfaction over long-term goals (hyperbolic discounting)
[Emotional] Status quo bias
When comfort in existing situation causes resistance in change
[Emotional] Endowment bias
Assets are felt to be more valuable because they are already owned
[Emotional] Regret-aversion
Market participants do nothing out of fear that action could be wrong
Persistent anomaly
Value stocks have steadily outperformed growth stocks - adding risk factors for firm size / book to market ration eliminated value stock performances
