4 behavioural biases that negatively impact one’s ability to invest in and how to avoid them
Once again, India seems to be in a sweet spot. We have just hosted the G-20, the World Cup is in full swing with India coming in strong with back-to-back victories, China seems to be committing eco-political hara-kiri, and most importantly India’s economy and stock market are scaling new heights.
Today it feels that everyone is a Jhunjhunwala, but if that were the case, all investors would be living in sea-licking, multi-million-dollar mansions. It is important in these times to keep a level head and a cool mind and avoid the numerous biases that leave us nursing our wounds when the bears come out to play.
As the Bhagavad Gita so succinctly reminds us, “For the one who has conquered the mind, the mind is the best of friends; but for one who has failed to do so, his very mind will be his greatest enemy."
Let us then decide to be friends with our minds by overcoming our biases when it comes to investing. Some of the more prominent ones that we fall for are:
Herd bias coupled with recency bias: Piling into flavours of the month along with everyone else — from the FAANGS to the HRITHIKS, to AI stocks or Crypto may leave one in a dangerous position and vulnerable to bear attacks. While they may be great companies or opportunities with a strong history of building wealth, they may not always be available at great valuations.
Just because a certain investment has done well for a period of time, does that mean that it will continue to do so? There is always constant disruption, business cycles or valuations that require the greater fool theory to play out. Apple may be a great company, but does everyone’s pensions depend on it growing at the same pace in perpetuity?
We need to independently and constantly keep reviewing our
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