Biases That Drive Bad Investment Outcomes

By Randall J. Cloud 

Have you considered why some believe they can predict and forecast the future?  The following biases are at the root of costly investment mistakes.

Overconfidence

A general disposition of confidence is very helpful in most areas of life. However, when it comes to investing, overconfidence most often leads to losses. It plays a major role in distorting reality for many leading them to the believe they can predict and forecast the future for specific companies, industries, and countries.  

Confirmation Bias

It is consistently placing greater value on the news supporting one’s existing beliefs while discounting or ignoring the news not supporting one’s held beliefs. This plays out when one believes the market will go in a certain direction.  Through reading articles and listening to “experts”, he inevitably comes across an “expert” who holds the same opinion which confirms what he believes.  The result is he believes he has the confirmation all the while ignoring solid dissenting opinions.

Familiarity

The tendency to stick with what one knows.  By doing this, it is the picking of individual companies and industries based on employment history or a family member’s or friend’s experience.  This bias provides a false sense of security by the impression of having control all the while ignoring their inability to control factors outside a specific company’s or industry’s control.

Regret Avoidance

It is the tendency to miss opportunities to make good decisions due placing greater value on past failures.  The struggle is to overcome the temptation to draw untrue conclusions as to why a bad investment outcome occurred thereby missing out on the opportunity to make a good investment decision. 

How to Avoid These Mistakes

It is important to accept the reality that there is not anyone who can consistently predict and forecast future market prices for individual companies, industries, and the general financial markets. 

If there are people who can, why would they share this information with anyone else as they would be giving up future profits.

The good news is that you do not have to be able to predict the future to reach your goals. 

You can have a successful investment experience by owning the U.S. Economy and Global Economy in the aggregate while tilting toward those companies who offer statistically higher expected returns.