7 Behavioral Biases that you NEED to know before investing

not knowing behavioral biases can make you lose a huge amount of money in the stock market the human brain has not evolved to invest it has evolved to survive and reproduce so your brain has many cognitive behavioral biases that can hinder your decision making without you even noticing hi welcome to the holder investor in this video we are going to learn seven behavioral biases that will help you to make better decisions in the stock market the first behavioral bias is the fear of missing out also known as fomo fomo is a feeling of anxiety or insecurity over the possibility of missing something imagine a stock that is skyrocketing your brain may start to want to buy it being afraid of missing this opportunity who doesn't want to win a lot of money in a fast and easy way this behavior can make you lose a lot of money as the asset suddenly can stop growing and start to fall let's look at gamestop as an example it was skyrocketing even not knowing anything about this company you may have thought about buying it to not miss the opportunity out this is fomo gamestop suddenly started to fall and many investors that had fomo and bought gamestop started to lose money so always think if you are not buying an asset only because you are afraid of missing out on an opportunity the second behavioral bias is confirmation bias which is a tendency to seek information that supports what we already believe and ignore information that contradicts these beliefs for example if you like a stock you may search for information and experts that will support your opinion and ignore those that contradict it sometimes you don't even notice that you do that you just ignore information that contradicts what you believe so the confirmation bias can lead investors to make decisions based on incomplete information for combating confirmation bias try to make rational decisions using all information available now the next one is particularly important many people lose a lot of money because of this so pay close attention to this one the third behavioral bias is herd behavior which is when people do what others are doing instead of making independent decisions our brain has evolved to survive and herd behavior helped humans to survive as a group but when we talk about investing following the herd can make us make bad decisions for example in the internet bubble crisis many people were buying internet stocks only because everybody was buying them many didn't even study the companies nowadays we can see a lot of people buying biotech company stocks that they don't even know what the company does they are buying those only because everybody is saying that it will be the next big thing another example is when people buy a specific stock only because some influencers are talking about it when you like a company that you studied and believe it will be a sound investment but everybody is saying that the company is not good you may start to think that you are wrong and everybody is right this is because of herd behavior what can make you lose money is that people can be wrong as they were about many internet stocks during the internet bubble of course you can hear what people are saying but you must use your own study to take your decision the problem is when you follow the herd without making your own analysis the fourth behavioral bias is loss aversion bias which describes that the pain of losing is psychologically twice as powerful as the pleasure of gaining loss aversion implies that one who loses 100 will lose more satisfaction than the same person will gain satisfaction from a 100 windfall the loss of versions bias can make you sell your investments when you are afraid it is going down this bias can make many people sell their stocks during a financial crisis as they are afraid to lose more money but these times usually are the best times to be buying stocks as in the long term they tend to grow as peter lynch said more people have lost money waiting for corrections and anticipating corrections than in the actual corrections if you stop investing because you are afraid of a correction you can lose more money as the stocks may continue to go up another example of how loss aversion can make you lose money is when you have a stock that is growing 100 and you sell it afraid to lose this gain however if the company is a great business it can continue to grow and you could lose a potential 10 times gain or even more so when you decide think if you are not making that decision only because of the loss of version bias the fifth behavioral bias is anchoring bias which is the tendency to anchor to a past reference or one piece of information when making a decision many people base their investment decisions on the current share price relative to its trading history however the trading history is in the past and using this information can lead to a huge mistake let's say a stock is ten dollars but six months ago it was twenty dollars you may think it is an opportunity and you want to buy it however you must analyze this investment based on the current date maybe the price dropped because the company is not good anymore another example of this bias is when people anchor to a single piece of information and don't consider the other relevant information when planning if you make a decision looking only at the net income of a company you may miss some other crucial information like the company's high debt rate so always try to base your decisions without anchoring information the sixth behavioral bias is overconfidence bias which is the tendency to see ourselves as better than we are 73 percent of americans consider themselves to be better than average drivers which is mathematically impossible this also happens in investing overconfidence bias tricks the brain into believing it's easy to consistently beat the market by making risky bats however the evidence shows that it is not that easy a 2020 morningstar report found that only 23 percent of all active funds beat their passively managed peers over the most recent 10-year period overestimating your abilities and knowledge can lead you to make bad decisions when you are overconfident you can do a poor search and miss out some information about an investment overconfidence may also lead you to overestimate your risk tolerance resulting in investment strategies that don't truly align with your needs and financial situation what can help you overcome this bias is to be humble and admit for yourself that you don't know everything and keep always studying to learn more as charlie munger said if you keep learning all the time you have a huge advantage the seventh behavioral bias is availability bias which is the tendency to estimate the likelihood of an event occurring based on how frequently we've encountered stories of that event whether it be media coverage friends or personal experience we rely on this incomplete information rather than seeking out more complete or factual information for example when a plane crashes you will see news about it everywhere with vivid images and stories to elicit an emotional response this can make people afraid of flying but when we look at facts the statistics show that the chances of experiencing a plane crash on a commercial airline are incredibly low but data doesn't usually speak to us emotionally it's much easier to remember the vivid images of destruction when making a decision about investing you may consider investing in something that you are seeing in the media like the metaverse or buying a stock because youtubers are talking about it note that the more familiar you are with the name of a company the more you will feel that it's a good buy so be careful to do a good analysis to check if the company is a good investment or not one tip that may help is to write why you are buying the company based on facts and numbers your behavior is very important in your investments in the book the psychology of money morgan household wrote about how behavior can lead you to be a better investor you can check out a summary video about this book by clicking on the card on the screen if you like this video please hit the like button and subscribe to receive more videos about investing bye

Channel: The holder investor

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Keywords: behavioral biases, confirmation bias, herd behavior, loss aversion, anchoring bias, overconfidence bias, and availability bias., fear of missing out, fomo, Behavioral Bias, invest, investments for beginners, invest in your 20s, warren buffett, stock market, behavioral investing, charlie munger, benjamin graham, passive income, financial crisis, loss aversion bias, herd behavior bias, what is value investing, the holder investor, invest for beginners, buffett

Id: X0ZUodxzMCg

Length: 8min 35sec (515 seconds)

Published: Wed Mar 02 2022