Investing in what you know is the first rule to
avoid making the worst mistakes. Those of you who have already read some of my
articles know how fundamental investment awareness is. Often, however, too much
awareness can lead to excessive trust in ourselves, or on the contrary our
emotions can put us in crisis so much that we remain paralyzed in the face of
what is the vast world of investments. So let's see 3 mistakes in
"behavioral finance" that you shouldn't make:
1)
Overconfidence
It is a widespread attitude that consists of an
excess of self-confidence, which very often determines wrong investment
choices, determined by clichés, memories and external points of reference such
as, for example, the past experiences of friends and relatives.
In investing, the bias of overconfidence often
leads people to overestimate their understanding of the financial markets and
ignore data and expert advice. This results in reckless attempts to time the
market or make risky investments without diversifying , thinking they are acting
"safe". There is no perfect formula for "overconfidence"
but being aware of the danger helps to be cautious.
2) Analysis
paralysis
Almost the opposite problem with respect to
overconfidence: to remain paralyzed because in difficulty in considering all
the various options. A problem common to many people who end up getting stuck
investing, as if they are suffering from paralysis. Choosing the do-it-yourself
method is not the right choice if you do not have a broad enough knowledge of
investment strategies and above all it will seem very difficult to define your
goal and therefore understand what is most important to you. But standing still
is not the solution! Liabilities can make you miss several opportunities and the
cost to pay is called inflation .
3)
Familiarity bias
One of the
most common cognitive distortions among investors is the familiarity bias,
which is the positive bias towards what we know best. Investors tend to trade
stocks they are familiar with. It's comforting to have your money invested in a
business you know - a bias of familiarity that has a strong influence on what
you buy. A perfect example could be government bonds or savings books, which
are among the preferred choices by United State, almost out of habit, even in
cases where they do not prove to be the most suitable solution.
Chip Heath and Amos Tversky, an American academic
and an Israeli psychologist respectively, have shown in a series of experiments
that when people have to choose between two bets, they will choose the one they
are most familiar with, even if for the latter the odds of winning. are
inferior! Just because you know that particular thing well doesn't mean it's
the best, you always need to look beyond your "comfort zone".
When it comes to financial instruments it is not
possible to choose one that is valid for all seasons: it is essential to rely
on a trained expert , so that your choices are supported by the knowledge of
the facts that only a professional, who deals with finance 24 hours out of 24,
it can instill you. The consultant will help you choose a direction, and take
that leap that, with his support (and over time) you will not regret having
taken.
Posted by: John Labunski
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