By Samin Gurung
Investing in NEPSE can seem daunting and overwhelming, especially for those who are new to the world of finance. With so much information available and so many different strategies to choose from, it can be difficult to know where to begin. But what if I told you that there is one key element to investing success that you may have been overlooking all along?
In this article, I will reveal the truth about investing and show you what you’ve been missing. You won’t find any get-rich-quick schemes or hot NEPSE stock tips here. Instead, I’ll delve into a fundamental concept that is often overlooked, but crucial to investment success.
Whether you’re just starting out as an investor or you’ve been at it for years, this article is for you. We’ll explore the common misconceptions about investing and the real secret to building wealth over the long term.
Investment Bias: Why Your Emotions Can Be Your Biggest Enemy in the Market
Investment bias can be a tricky problem for investors, no matter how much experience they have.
When our emotions and cognitive shortcuts take over, it can make us forget rational analysis and objective data, leading us to make poor investment decisions, miss out on opportunities, or even lose money.
Emotions play a huge part in investment bias. Fear, greed, and overconfidence are some of the feelings that can trip us up.
Aside from emotions, our brains also have cognitive shortcuts that can cause investment bias. These mental tricks help us process information quickly, but they can also make us prone to biased decision-making.
In this article, we will explore the most common investment biases that exist among investors in NEPSE.
This is probably the most common investment bias among investors in NEPSE.
Herd mentality bias, also known as herd behavior, occurs when individuals follow the actions and behaviors of a larger group, even if those actions are irrational or misguided. This phenomenon is often seen in the NEPSE, where investors tend to follow the trends of other investors rather than make independent decisions based on their own analysis.
For example, if a particular stock is performing well and everyone is talking about it, investors may jump on the bandwagon and start buying the stock without fully understanding the underlying factors driving its success. This can lead to an inflated price, and when the bubble bursts, many investors are left with significant losses.
Similarly, if a stock is performing poorly and investors begin selling, others may also sell without fully understanding the reasons behind the decline in price. This can lead to panic selling and further declines in the stock’s value.
Instead of following the crowd, do your own research and analysis to make informed decisions. This can mean considering factors like the company’s financial health, industry trends, and other relevant information before making an investment.
It’s important to remember that just because everyone else is doing something, doesn’t mean it’s the right thing to do.
Confirmation bias is a really interesting concept that can help us understand how our brains work when it comes to decision-making.
Basically, it means that we tend to believe what we want to believe and ignore or dismiss anything that contradicts our beliefs. This can happen without us even realizing it, and it can be a problem because it means we’re not really considering all the facts.
Let’s say you’re really into a certain stock, and you think it’s going to do well. You might start paying more attention to news articles or opinions that support your belief while ignoring anything that suggests the stock might not do so well. This is confirmation bias in action.
Confirmation bias can lead us to make decisions that aren’t based on all the information available to us, and this can be a problem when it comes to things like investing, where making informed decisions is really important. If we’re only paying attention to information that confirms what we already believe, we might miss out on important details that could change our minds.
So how can we avoid confirmation bias? One way is to make a conscious effort to seek out information that contradicts our beliefs, rather than just looking for things that confirm them. We can also try to be more open-minded and willing to consider other perspectives.
Overconfidence bias is another interesting concept that can help us understand how our brains work when it comes to decision-making. It basically means that we tend to think we know more than we actually do, or that we’re better at things than we really are. Let’s say you’re really into investing, and you’ve had some success picking stocks. You might start to feel like you’re really good at it, and that you can pick winners consistently. This feeling of overconfidence can lead you to take bigger risks or make riskier investments because you feel like you have a better understanding of the market than you actually do.
“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” – Jason Zweig
Overconfidence bias leads us to make decisions that are based on inaccurate or incomplete information. We might overestimate our own abilities or the chances of success, and this can lead to losses or missed opportunities. To avoid overconfidence bias, be more aware of your own limitations and the limitations of your knowledge. Try to be more humble and recognize that there’s always more to learn. Be cautious when it comes to making investment decisions. We can’t predict the future, and even the most knowledgeable investors make mistakes.
Loss Aversion Bias
Essentially, the Loss Aversion bias means that people would rather avoid losing something than gain something of equal value. This bias can have a significant impact on investment decisions, as investors may be more focused on avoiding losses than on maximizing gains.
For example, let’s say an investor purchased a stock for Rs. 1000 per share, and it drops to Rs. 800 per share. Loss aversion bias may cause the investor to hold onto the stock rather than sell it, in hopes that the price will eventually rise again. This may result in missed opportunities to invest in other stocks with greater potential for growth.
Similarly, loss aversion bias can also lead investors to sell stocks prematurely, in fear of losing more money. For example, an investor may sell a stock that has decreased in value by 10%, even if there are no fundamental reasons for the decline.
To overcome loss aversion bias, focus on their long-term investment goals rather than short-term fluctuations in the market. Have a well-diversified portfolio that includes a mix of stocks, bonds, and other assets. By diversifying, investors can reduce the impact of any one investment on their overall portfolio and minimize the impact of losses.
Anchoring Bias is like when you get hooked on a stock price like a fish on a line, and you can’t let it go even when there are other opportunities out there. Let’s say that you’re interested in investing in a certain stock that is currently priced at Rs. 500 per share. That number, Rs. 500, becomes your anchor point.
Later on, you see that the stock is actually priced at Rs. 600 per share. Instead of looking at all the available information to make an informed decision, you might anchor to that initial Rs. 500 and think that the stock is too expensive now, and not worth investing in.
On the other hand, if the stock price had gone down to Rs. 400 per share, you might anchor to the original Rs. 500 price and think that the stock is a bargain now, without considering other factors that might have caused the price drop.
You need to consider all the available information to make a wise decision. Don’t be like a dog with a bone and refuse to let go of that initial number. Keep an open mind and don’t get too attached to any one stock price, or any one stock itself. There are plenty of fish in the sea, and plenty of stocks to choose from. Don’t be afraid to explore and see what else is out there.
In NEPSE and stock markets worldwide, investors tend to over-account for events that happened recently. However, another crash will never happen after a big crash, and another peak will never happen immediately after the bull market bubble bursts.
Recency bias is a way that our brains work that makes us think that what happened recently is more important than things that happened earlier. It’s kind of like how you might remember what happened at the end of a movie more than what happened in the middle.
In the world of investing, recency bias can cause people to make bad decisions. For example, if the stock market has been going up for a long time, people might think it will keep going up and invest a lot of money. But then, if the market suddenly drops, they might panic and sell their stocks, even though it might be better to wait and see what happens.
Recency bias can also cause people to miss out on good investment opportunities. For example, if a company has been doing well for a long time, but then has a bad quarter, people might think the company is no longer a good investment and sell their stocks. But then, if the company bounces back, investors regret their decision.
To avoid recency bias, remember that what happened in the past is just as important as what’s happening now. It’s also important to look at a variety of sources and not just rely on what’s in the news or on social media.
Understanding investment bias is crucial for successful investing. As we’ve discussed, our emotions can lead us to make irrational decisions, especially when it comes to money. Recognizing and overcoming these biases is key to avoiding costly mistakes and achieving long-term financial goals.
While it’s impossible to eliminate all biases, being aware of them can help us make more informed decisions. Taking a step back, doing our own research, and seeking the advice of professionals can also help us avoid making hasty and emotional decisions. Ultimately, successful investing requires a combination of knowledge, discipline, and emotional intelligence. By acknowledging and managing our investment biases, we can make better decisions and achieve greater financial success in the long run.
Author Bio: A former media officer at Sharesansar, Samin now provides freelance content writing and SEO services and practices KickBoxing Muay Thai. When he is not strumming his guitar, you’ll find him writing about financial freedom on nepalearn.com.