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Investment Behaviour

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How often is that you chose someone for a particular task just because he is nice and end up making a bad choice? This is the phenomenon of Halo effect where one attribute of a person overshadows the other attributes and influences the decisions we take. The attribute niceness of your partner has overshadowed the other essential attributes like competence and intelligence. What is the Halo Effect? Halo effect is a human cognitive tendency to…

Beware of outcome bias: Focusing on process pays higher dividends There is a human tendency to focus entirely on the outcome and not on the process. Someone scoring good marks, someone winning a game, election, fight, etc. has a lot to do with overall context under which the results came. Many times we underestimate the power of context which plays a major role in driving any kind of outcome. Many people also avoid understanding the…

Social Proof plays a very dominant role in decision making by those people who are not confident & thorough enough about a particular subject. Historically, people have felt safe and confident in following the herd instinct. The more people that display a certain behavior, the more acceptable we think that behavior is. The more people follow a certain idea, the more correct we think that idea is. Usually, most of the people have expertise in…

Sometimes inaction speaks louder! – Action Bias If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring. – George Soros When the investors are not clear of the situation in the market, they are prone to action bias i.e. they trade even though there is no evidence of returns. The notion that the more you trade, the more returns you get is false because on top of no…

(sunk cost) There is a misconception that people make rational decisions based on the future value of objects, investments, and experiences. But the truth is that decisions of many people are tainted by the emotional investments they accumulate and the more they invest in something the harder it becomes to abandon it. Let us understand this with the help of an example: Rajesh had a very hectic and long day in the office. He had some…