Financial decisions, diversity of views and the role of investment advisers

livemint.com:

Confirmation bias: This is the tendency to search for, interpret, focus on and remember in a way that confirms our preconception. An investor whose investment holdings are concentrated in a specific sector or group of stocks may only absorb good news and ignore bad news regarding these investments. Anchoring: Tendency to focus on one piece of information when making decisions, usually the first piece of information obtained on the subject.

An investor buys a stock because it has fallen by 20-30% in, say, last 3-6 months. Here the investor is incorrectly anchoring to the stock price prior to the decline, or to the price trend in the last 12-26 weeks. In reality, the stock may fall further and the right anchor should be the fair value of the stock.

Familiarity/home bias: Tendency to overweight an outcome based on perceived familiarity with it. Investors holding India or sector- or funds-centric portfolio because of their familiarity with the same. Endowment effect: Individuals often ascribe a higher value to their possessions merely because they own them, which can influence decision-making, particularly in economic transactions and negotiations.

Employees of a company might continue to invest in its share because they work for the company and they see the vision, disregarding the valuation of the company, or even the financials. Overconfidence bias: The tendency to overestimate the precision of our own valuation abilities. A trader operating in financial markets is certain that their prediction about a stock trending upwards is accurate.