7 Behavioral Bias To Avoid In Investment Management

The Financial Post has published an interesting article today on behavioral biases that investors should avoid. The author David Pett notes the following seven biases:

  1. Representativeness
  2. Familiarity 
  3. Overconfidence
  4. Anchoring 
  5. Attachment bias
  6. Gambler’s fallacy
  7. Herd mentality

Source: 7 stock picking behaviours you should avoid, Financial Post

An important bias noted in the article:

Familiarity is a dangerous inclination that can thwart the benefits of global diversification. Many investors concentrate too much on opportunities in their own country because it’s what they know and understand best.

“Investors generally feel more comfortable with their home market and allocate investments accordingly, even if it results in a poorer risk–return trade-off for their portfolio,” said analysts at The Vanguard Group Inc. in a 2012 report.

Home country bias is one of the main emotional biases that many investors can’t seem to ignore. A typical U.S. investor has most of the assets invested in U.S. assets including stocks and bonds despite the availability of better opportunities abroad. Even many Financial Advisors, who should be better in their profession than the investors that hire them, fall into this trap. The key point that investors should remember that in a globalized world, companies are not tied to one country anymore and they are not patriotic in any way. Hence investors should change their mindset accordingly and not get too attracted to home country companies. Investors looking for income for example, can get much higher yields in companies located just north of the border in Canada or in far away places like Australia, Chile, etc.

The whole article is worth a read.

Here is a cool chart I came across a while ago on the “Types of Herd Behavior”:

Click to enlarge

Types-of-Herd-Behavior

Source: Unknown

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