Psychology Flashcards
Overconfidence
leads people to overestimate their knowledge, underestimate risks and exaggerate their ability to control events and predict outcomes.
Illusion of control
common in day trading, sports betting
Persuasion Bias
susceptibility to making decisions based on social influence and the repetition of information
Recency Bais/Effect
Recency bias can make investors focus more on the most current events, leading to faulty predictions that this is always how it will always be.
tendency to best remember the information that was presented last
last item
closing argument
Regret Aversion
Crippling effect that comes form fearing a negative outcome
regret-averse people avoid making a decision altogather
Representatives Heuristic
Labeling something because of it’s connection to a larger group with similar characteristics
Salience Bias
Tendency to focus on highly emotional events/information and be impacted by it
Status Quo Bias
Seek-out the path of least resistance; primitive survival instinct
Sunk-cost Fallacy
Tendency to follow-through on something even though the costs outweigh the benefits
Loss Aversion
Loss hurts more than wins so we become risk-averse
Gambler’s Fallacy
We think future possibilities are affected by past events
Law of Small Numbers Bias
bias of making generalization form a small sample size
Familiarity Bias
Familiarity leads to home bias and single stock concentration.
Endowment Effect
a cognitive bias that describes the tendency of people to value items they own more than similar items they do not own.
Mental Accounting
can lead to naïve diversification (i.e., the assumption that simply investing in enough unrelated assets will reduce risk sufficiently to make a profit).
Disposition Effect
People seek pride and avoid regret
Sell winners too quickly (confirms correct choice)
Hold losers too long (avoids confirming incorrect choice)
Bandwagon Effect
Ideas, fads, and beliefs grow as more people adopt them
Availability Bias
We rely on immediate examples that come to mind while making judgements
Affinity Bias
tendency to favor people who share similar interests, backgrounds and experiences with us
Factors leading to overconfidence:
Choice
Task familiarity
Information (confirmation bias)
Active involvement
Past success
Heuristic
any approach to problem-solving that employs a more practical method that is not guaranteed to be optimal or rational, but is sufficient for reaching a short-term goal or approximation.
Examples: Rules of thumb, educated guesses, and trial & error.
Heuristics reduce the cognitive load of decision making.
This ease allows biases to cloud objectivity.
Anchoring
is where an investor sets a value at the initial point of information (typically their buy price).
Prospect theory
People suffer more greatly from losses than they benefit from gains.
When investors consider the past, they tend to suffer from
House money effect (take more risk)
Snakebite effect (take less risk)
Break-evenitis (take more risk)
herd mentality
Leaning towards what everyone else is doing
We find comfort in groups/numbers.
