Investing is as much about managing your psychology as it is about managing money. A recent study published in Acta Psychologica, for instance, found that behavioral biases account for a whopping 20.5% of variance in investment decision-making behavior.
Considering the significant impact of bias on decision-making, investors and financial advisors who have tools for managing trading bias will likely enjoy improved investment outcomes. To put this into perspective, consider a company where a single change resulted in a 20.5% performance improvement. Such a dramatic shift would drive profits and competitiveness.
Understanding how biases affect trading and other investing decisions is the first step toward improving your outcomes. Let’s start by exploring the different types of bias.
What Biases Impact Financial Decision-Making?
A cognitive bias is a mistake in thinking that happens when your brain tries to simplify information processing. These biases can lead you to make decisions that aren't logical or based on fact. In investing, biases can cause you to make choices that hurt your financial returns.
Here are some of the most common and impactful biases affecting investment decisions:
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Overconfidence Bias
Overconfidence bias happens when investors think they know more than they actually do. These investors often believe they can predict the market, but their incomplete knowledge leads to poor decision-making. -
Herding Bias
This bias is responsible for most market bubbles. Herding occurs when many investors buy into the same trend without independent analysis, leading to inflated prices and eventual collapse. - Disposition Bias
Disposition bias is a form of loss aversion where investors tend to sell winning investments too early, while holding onto losing investments. - Risk Aversion
The preference for safer investments, even if riskier ones might offer better returns. Over time, an overly conservative portfolio might underperform, especially in a growing market. - Representativeness Bias
Making decisions based on small samples or recent events rather than a comprehensive analysis. Without the bigger picture, investors can overreact to short-term trends. - Anchoring Bias
The tendency to rely too heavily on the first piece of information encountered. If this information is wrong, investors might buy overpriced securities or sell underpriced ones.
We’re all subject to our biases but by understanding how they affect our thinking, we can start minimizing their impact. But knowing is only half the battle. The other half is having the tools and data in place to limit bias and make more objective decisions.
How Researching Financial Market History Aids in Identifying Trends, Patterns and Cycles
Biases are mental shortcuts our brains take when trying to understand trends. Biases are, by definition, narrow thinking. Researching the history of financial markets over the long-term is an antidote to bias as the data can provide a comprehensive view of trends, patterns and cycles demonstrated over time. By studying charts and indicators in this manner, investors can sharpen their focus on how markets behave over time and under different conditions. This perspective can enable investors to see beyond short-term "noise", volatility and biases to help make decisions based on data-driven analysis of market behavior.
As facts never lie, data-driven analysis of market history offers an objective foundation for helping identify market behavior — a more rational and empirical approach than relying on gut feelings or trending news and rumors.
Let's not forget — past performance is never a guarantee of future behavior, but with enough history and unbiased analysis it can offer an objective view.
Using Research Platforms to Overcome Investing and Trading Bias
The right market research platform can provide access to historical behavior on all key markets, including stocks, bonds, and commodities, as well as important assets like currencies and ETFs. These platforms enable investors to identify market trends within the data, offering insights that might not be immediately apparent.
The Socrates Platform was built using unbiased proprietary computer models that analyze global financial market data history to generate unique indicators looking for possible trends, patterns, and cycles over time. With multiple membership options, users can study markets based on their own research needs.
Investing Without Bias
Successful investing requires understanding human biases and relying on a combination of data and research tools to make more informed and rational decisions. As a human, it is impossible to be completely unbiased, but we can take steps to minimize the impact of our biases.
As a market research tool, the Socrates Platform isn't a financial service and doesn’t provide financial recommendations or advice on which investments or trades to make. Instead, Socrates Platform offers access to unbiased data to research on a range of global financial markets (including stocks, bonds, commodities, currencies and crypto). Knowledge is power.
Want to learn how Socrates can empower your market research?
Explore our Membership Plans to find a version of Socrates that works for you.
