Investment University

Traders, You must be Aware of These Mind Flaws.

Trading is like an MMA fight. A constant battle with your emotions.

Many traders, even experienced ones, often exit their trades before the optimum time. And then there is nothing but regret!

Always understand that most things happen in the subconscious mind. And, our actions are an outcome of the same emotional fight.

But don’t get upset if you have just realized the psychological biases that humans possess.

We, at First Global, are there for you.

In this article, we will cover most of the “psychological biases” that your mind goes through when you trade. So, without further delay, let’s get started:

We can segregate the Psychological biases into three main broad sections -

  • Cognitive biases

  • Information-processing biases

  • Emotional biases

Cognitive biases

Things are all around. You take them as inputs and find your own patterns. This way of creating own “subjective reality” is Cognitive bias.

There are various subheads under this bias. Let’s quickly go through them.

Confirmation bias: As per this bias, investors pay attention to only that information that agrees to their earlier beliefs. It’s like: “I already knew this! “

Hindsight bias: More of selective memory bias. On repetition of past events, you would say, “I would have easily predicted this!”

Illusion of Control Bias: Having control, doesn’t mean it’s a sure win for you. For example, when you take a lottery ticket, and you have given two options. One is to select a random number ticket, and the other is to choose their own numbers. Being humans, you will feel more assured in the later one. That’s just Illusion of Control Bias.

Conservatism bias: This bias is similar to anchoring and adjustment bias. We’ll get into that soon. But, basically, conservatism bias is about the fresh data and relying on the previous data. Few investors who stick to certain investments for long ignoring the recent news and focusing on the initial assumptions are perfect examples.

Information Processing bias

This type of bias occurs when traders process irrationally or illogically. Here are its subtypes:

Framing bias: Most traders set their own strategies involving technical indicators, entry & exit points. However, they are framing their options, limiting opportunities.

Anchoring and Adjustment bias: You buy a stock at Rs. 100. As price drops to Rs. 80, you become anxious as you focus on the loss with reference to the initial buy. And, not on the real cause of the decline and its sustainability. However, you might adjust the loss with your hindsight bias.

Mental Accounting bias: People place a different value on money based on particular criteria that mostly have counterproductive results. Examples are money invested in safe portfolios and speculative portfolios.

Availability bias: Traders can escape this bias by checking the likelihood of winning. It’s like buying a lottery and expecting a win when you have an infinitesimally small probability of winning.

Emotional biases

Loss Aversion bias: One day, you profit Rs. 2000. And, the next day, you lose Rs. 500. Then, you are a victim of loss aversion bias as focus more on the negative side of the picture.

Overconfidence bias: Life is a probability. Then, why stay overconfident on such probabilities, believing it will occur anyhow.

Self-control bias: A bias that asks to control own emotions. Given two opportunities, humans tend to pick the first one over the one that came laterwards.

Regret Aversion bias: You traded in Tata Motors when it was at Rs. 200. And, post your entry, the share price dropped. Now, you are feared to trade again with Tata Motors in that range as your mind recalls earlier losses.

How did you find this short piece? Do let us know!

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