(Common Biases that Investors Face)
Behavioral finance biases….where do I begin? Is this really an article about potential pitfalls that you might experience or is it a biography about my first experiences investing? Either way, below are seven behavioral finance biases that you MUST avoid!
If you have already fallen into some of these, it’s ok. Stop, find your way out, and get going in the right direction!
Behavioral Bias #1: Endowment Effect
The Endowment Effect quite possibly has the greatest opportunity to trip you up in your investing journey. I wrote about this at length in my previous posting, but in short, the Endowment Effect is when you place a greater value on something that you already have over something that you are looking to buy.
For instance, a blanket that you own that you had throughout your childhood might be worth more to you than someone that is wanting to purchase it for the sole reason of keeping warm. You have a perceived, non-monetary reason to place a higher value on it that others do not.
Many studies have been done on this, with one of the most famous examples being where a group of people were split into two groups, half of which were given a coffee mug and the other half were not.