Objective evaluation is the best way to avoid such biases and make rational investment decisions.ĭo you want to know – What is Simple But Most Powerful Tool To Avoid Investment Biases? No one can be right all the time or wrong all the time. Hindsight bias is a behavioral trait that can lead to problems in your investment portfolio. This helps in managing risk better and building a suitable investment portfolio.ĭo your research thoroughly, understand the pros and cons of all investment decisions and actions and then choose the most appropriate one in your current situation rather than being swayed by past predictions. Look for performance indicators while making investment decisions. It is better to have a realistic view of our strengths and limitations. We follow the same pattern of decision making and somewhere down the line, we lose money. We tend to become overconfident when we feel that we have predicted events correctly. It is a good idea to diversify the investment portfolio so that it is protected against unexpected negative outcomes. Hope for the best but plan for the worst. This will help in a more holistic investment decision.Įxpect the unexpected. Search for reasons or news items that go into the decision. For example, if you have decided to buy a stock, do not look for reports and news articles that support your decision (this is confirmation bias). It is best to acknowledge it and then work around it so that we do not make wrong investment decisions. Rather than focusing only on the right decisions, one should objectively evaluate all investment decisions – right and wrong.īe aware of the influence of hindsight bias –Ī majority of us have a hindsight bias. But we can learn from past performance of investment assets, market behaviour and our behaviour and decision making. It is not easy to predict different scenarios. For example, when the technology bubble was busted in 1998, a lot of people said, ‘I knew it’ but very few of them had forecasted it. We should learn from past mistakes – our mistakes made in the investment world. In hindsight, this might be easy, but at that time, there were many other factors and signs which would have made it difficult to predict. This can lead to irrational decisions regarding our finances.Īnother mistake form of decision making is that if an event happens, we tend to look back and look for signs and pointers that proved that the event will happen. We remember the times our predictions were right and ignore the wrong ones. We tend to use memory rather than data and other factors to evaluate past decisions. Believing that unpredictability is the norm will not have too many nasty surprises. It is not possible to think of all possible outcomes but we have to be ready for unexpected outcomes. If we do not remember smaller events that affected our portfolio, we may not be managing the portfolio in the best manner. This results in not planning for the unexpected events. We tend to remember only the big unexpected events. We tend to look for expected outcomes in any decision/action we take. This might lead to irrational and risky investment behaviour. It might be that the factors that allowed us to predict correctly made the decision easy or obvious. We only remember the instances when we were right and overlook the times when we were wrong. If we pick some stocks or purchase some mutual fund schemes and they perform well, we believe that we have excellent investment skills. It can lead to overconfidence in our investment skills. Hindsight bias can lead negative effects on our investment behaviour and overall personal finances – Hindsight Bias – Did you know it already? Click to Tweet Impact of Hindsight Bias on your Investments
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