What is prejudice?
In trading, bias is a psychological phenomenon in which an investor makes a decision based on an expectation of the effectiveness or ineffectiveness of a strategy without considering the evidence. Bias is also manifested in holding an asset for too long or acting against its best interests.
Where have you heard of prejudice?
As investors you may have been warned by a financial adviser not to be biased. Investment guides may discuss the dangers of bias, and professional financial media also mention this topic from time to time.
The information you need to know about bias...
One of the most common forms of bias is confirmation bias, where investors seek evidence to support their preconceived positions. Warren Buffett, the investment tycoon, has discussed confirmation bias. To avoid this bias, he argues, investors should:
- Understand the dangers of confirmation bias and acknowledge that your judgment may be influenced by it.
- Actively seek and understand information that contradicts their existing beliefs.
Another form of bias is cost bias. Cost bias is the case when some investors invest a lot of money, time, or energy in a particular speculation or investment, and then continue to invest without stopping losses, even if they fail repeatedly. Keep in mind that investing does not necessarily have a "return".
