It’s human nature to struggle with decisions when we’re under pressure, so it shouldn’t be a surprise that this trait can hamper our investment plans.
There are thought to be three biases that cause most people to make such poor investment choices: anchoring, the tendency to extrapolate from recent events, and drawing conclusions from stereotypes.
Anchoring occurs when you focus your attention on just one element of a decision while ignoring the rest of the evidence. This might occur if an investor chooses to concentrate on a company’s share price while neglecting to consider other factors involved in its success rate.
The tendency to give more recent events a higher weight is problematic for investors because they often end up chasing stocks or sectors that did well in the past, but might not be doing as well now. Drawing conclusions from stereotypes can lead to a dismissal of excellent investment opportunities.