Commonly Known Investment Biases

Question 1

Affect Heuristic

Answer 1

Deals with judging something, whether it is good or bad. Do they like or dislike some company based on non-financial issues

Question 2

Anchoring

Answer 2

Attaching or anchoring one’s thoughts to a reference point even though there may be no logical relevance or is not pertinent to the issue in question. Also known as conservatism or belief perseverance

Question 3

Availability Heuristic

Answer 3

When decision maker relies upon knowledge that is readily available in his or her memory, the cognitive heuristic is known as ‘availability” is invoked. This may cause investors to overweight recent events or patterns while paying little attention to longer term trends.

Question 4

Bounded rationality

Answer 4

When a individuals make decisions, their rationality is limited by the available information, the tractability of the decision problem, the cognitive limitations of their minds, and the time available to make the decision

Question 5

Confirmation Bias

Answer 5

“You do not get a second chance at first impression” People tend to filer out information and focus on information supporting their opinions.

Question 6

Cognitive Dissonance

Answer 6

Pay attention to information that supports an existing opinion and misinterpret information that is contrary to an existing opinion

Question 7

Disposition Effect

Answer 7

Also known as regret avoidance or “faulty framing” where normal investors do not mark their stocks to market prices. Investors create mental accounts when they purchase stocks and continue to market their value to purchase prices even after market prices have changed.

Question 8

Familiarity Bias

Answer 8

Investors tend to overestimate/underestimate the risk of investments with which they are unfamiliar/familiar

Question 9

Gambler’s Fallacy

Answer 9

Investors often have incorrect understanding of probabilities which can lead to faulty predictions. Investors may sell stock when it has been successful in consecutive trading sessions because they may not believe the stock is going to continue upward trend.

Question 10

Herding

Answer 10

People tend to follow the masses

Question 11

Hindsight Bias

Answer 11

Looking back after the fact is known and assuming they can predict the future as readily as they can explain the past

Question 12

Illusion of Control Bias

Answer 12

Tendency for people to overestimate their ability to control events,it can occur when someone feels a sense of control over outcomes that they demonstrably do not influence.

Question 13

Overconfidence Bias

Answer 13

Concerns an investor that listens mostly to himself or herself, overconfident investors mostly rely on their skills and capabilities to do their own homework or make their own decisions. This effect causes many investors to overstate their risk tolerance.

Question 14

Overreaction

Answer 14

A common emotion towards the receipt of news information

Question 15

Prospect theory

Answer 15

people value gains and losses differently and will base their decisions on perceived gains rather than perceived losses

Question 16

Recency

Answer 16

Giving too much weight to recent overservations or stimuli, focusing on short-term past and performance

Question 17

Similarity Heuristic

Answer 17

Used when decision or judgment is made when an apparently similar situation occurs even though the situations may have very different outcomes.