What are Emotional Biases?

Two of the most powerful emotional biases in investing are fear and greed. Fear can cause investors to panic sell during market downturns, locking in losses instead of riding out the storm. On the other hand, greed can lead to chasing hot stocks or speculative assets, often resulting in overvaluation and eventual disappointment.

Fear and Greed

Confirmation bias is another common pitfall for investors. This bias occurs when individuals seek out information that confirms their pre-existing beliefs while ignoring evidence that contradicts them. In investing, this can lead to a lack of diversification and a failure to consider alternative viewpoints, increasing the risk of significant losses.

Confirmation Bias

Loss aversion refers to the tendency for individuals to strongly prefer avoiding losses over acquiring gains of equal value. This bias can lead investors to hold onto losing investments for too long, hoping for a turnaround, rather than cutting their losses and reallocating their capital to more promising opportunities.

Loss Aversion