Off-late there have been a lot of studies going around the behavior of investors. With the advancement of research came several facts and aspects of human nature and its effect on investing. The outcomes were recorded in the form of biases which are behavioral inclinations towards a particular type of trend or fact or mindset which otherwise deviates one from the normal course of things.
Investing is not a new concept; it has been in the trade market for ages and decades. From keeping money with the Sahukar/Munshi to earn interest back then and now investing in the stock market, mutual funds, real estate; investing has grown. With the growing needs and greed, came up the concept of dissonance in individualistic behavior while investing. This dissonance is a bias and can prove extremely fatal.
Rooted deep inside a single culprit- Overconfidence, the investment bias is a serpent that can slowly poison your portfolio. The biases are majorly of three types with overconfidence as the foundation:
Once they get hold of you, your portfolio is bound to get degraded.
How to recognize if you are working under the narrative of a bias?
Of the three biases mentioned above, the following three characteristics are most prevalent-
placing oneself above others,
considering oneself to be the better one and holding very high standards of self-knowledge and intuition.
If you feel that any or all of the following are dominating your general and investment behavior, you need to introspect and bring about positive changes in yourself. You can even take the help of an investment behavior specialist who is an expert in such cognitive biases.
How can I beat the overconfidence in investing?
Here are a few tips that can help you in identifying and beating the overconfidence which rules your investment behavior.
The first thing to do is asking questions to yourself. Before every investment decision, ask yourself the necessary questions and slow down your thinking process. You do not need to think and answer and act right now. Patience is a virtue in investing, exercise it. Also, never act in a hurry with investment.
There is an extremely thin line between being confident and overconfident. Try to understand the difference between the two. Always enter a discussion or decision with the consideration that you may be wrong and may come back with new learning.
Pay attention to things that are supported by evidence and facts. Always be open-minded and exercise acceptance to new thoughts, ideas, facts.
Calculate what will happen if you are wrong? The first thing to do is not to lose money. Try your best to conserve your money and then base your decisions on these lines. Remember, everything in investing is inter-related. If you come across an issue, do not view it in isolation. Consider what impact other related things had on it.
Do not let regret seep in. This is valid in both cases if you are handling your own investment account or are an advisor or planner. Regret can backfire on you, your clients may sell and buy funds at the wrong time under its influence and will gradually fire you for the incompetence.
Always be curious about what is going around. Welcome and seek positive advice. Do not be emotional about your portfolio. Be practical and vigilant.