A cognitive bias is our idea of how things should be, even if it’s not true.
A cognitive bias is a deceptive and deceptively logical way of thinking.
In other words, it’s when we rely solely on our experiences, our feelings, or our beliefs and not on facts, to make our decisions.
For many people, investing (and saving) works the same way, involving several different cognitive biases.
Gold investing involves many steps, from collecting data to evaluating your investment options, to buying and selling those investments.
With the information overload we encounter today, it is easy to fall into certain psychological traps and overlook some important aspects that can affect your investment decision!
Cognitive Investment Bias: Confirmation Bias
As we often say, the first impression is often the right one!
Confirmation bias causes us to seek out information that coincides with our existing beliefs and rejects others.
So investors with confirmation bias are more likely to focus only on information that supports their opinion.
For example, investors may hold the stock of a company in decline much longer than they should, simply because they interpret every news about the company positively, seeking to reinforce their belief that the company is still a good investment.
Therefore, confirmation bias can make our investment behavior irrational. By drawing the wrong conclusions based on incorrect reasoning, we can make bad investment decisions.
How To Avoid Confirmation Bias?
First, be aware of the danger of confirmation bias and know that it can impair your judgment. Second, actively seek out and understand information that goes against your current beliefs.
As Charlie Munger, vice chairman of Berkshire Hathaway and Warren Buffett’s closest partner, once said: “The rapid destruction of your ideas when the time comes is one of the most valuable qualities you can acquire. You must force yourself to consider the arguments of the other side.”
Cognitive Investment Bias: Loss Aversion Bias
Psychologically, the pain of loss is much greater than the pleasure of gaining. In other words, people will often rather not lose $50 than win $50.
So, to avoid losses, an investor might hang on to a losing asset for too long, hoping that it will eventually recover.
Such an investment strategy could cause him to take too much risk, which would lead to even greater losses later on.