If we are scared, we make bad calls

BE ON guard for these specific thought processes that will prevent you from making good investment choices.

LOSS AVERSION:

The feeling of wanting to avoid a loss and doing all we can to reduce the chance of it happening.

The evidence suggests that we feel losses at least two to three times as strongly as we feel an equivalent gain.

ENDOWMENT EFFECT:

Placing more value on something we own than something we don’t own. This bias means that we often hold on to investments long after they’ve become irrelevant to our goals.

REGRET AVERSION:

This is where people think about the worst possible outcome and how they would feel if that outcome was realised. This leads people to choose options that reduce or eliminate the chance of regret, even if the decision is not the right one.

STATUS QUO BIAS:

This is when people prefer things to stay the same by doing nothing or by sticking with a choice that they have already made. This is one of the reasons people often choose default investment funds in their pension – the one offered initially by their provider – or refuse to change a losing investment strategy.

DISPOSITION EFFECT:

This is where we tend to hold on to losing investments for too long while selling winning investments too quickly. This is closely linked to loss aversion.

HERDING BIAS:

Nothing to do with herd immunity. This is simply a compulsion to follow the crowd – and a natural discomfort when you feel that you are going out on a limb.