Investing in what you know is the first rule to avoid making the worst mistakes. Those of you who have already read some of my articles know how fundamental investment awareness is. Often, however, too much awareness can lead to excessive self-confidence, or on the contrary our emotions can put us in such a crisis that we remain paralyzed in front of what is the vast world of investments. Let's see, therefore, 3 mistakes in the field of "behavioural finance" not to be made:
1) Overconfidence
It is a widespread attitude that
consists of an excess of self-confidence, which very often determines wrong
investment choices, determined by clichés, memories and external points of
reference such as, for example, the past experiences of friends and relatives.
In investing, the overconfidence
bias often leads people to overestimate their understanding of the financial
markets and ignore data and expert advice. These results in reckless attempts
to time the market or make risky investments without diversifying, thinking
they are acting “safely”. There is no perfect formula for “overconfidence” but
being aware of the danger helps you to be cautious.
2) Analysis paralysis
Almost the opposite problem
compared to overconfidence: being paralyzed because it is difficult to consider
all the various options. A common problem with many people who end up getting
stuck from investing, as if they were suffering from paralysis. Choosing the
do-it-yourself method is not the right choice if you don't have a broad enough
knowledge of investment strategies and above all it will seem very difficult to
define your goal and therefore understand what is most important to you.
Staying still is not the solution though! Passivity can make you lose several
opportunities and the cost to pay is called inflation.
3) Familiarity bias
One of the most common cognitive biases among
investors is familiarity bias, or the positive bias towards what we know best.
Investors tend to trade stocks they are familiar with. It's comforting to have
your money invested in a business you know - a familiarity bias that has a
strong influence on what you buy. A perfect example could be government bonds
or savings books, which are among the favourite choices of United States,
almost out of habit, even in cases where they are not the most suitable
solution.
Chip Heath and Amos Tversky, an American academic and an Israeli psychologist, respectively, have shown in a series of experiments that when people are faced with the choice between two bets, they will choose the one that is more familiar to them, even if for the latter the odds of winning they are inferior! Just because you know that particular thing well, however, does not mean it is the best ever, it is always necessary to look beyond your "comfort zone".
When it comes to financial instruments it is not possible to choose one that is valid for all seasons: it is essential to rely on a trained expert Salvatore Magaraci, so that your choices are supported by the knowledge of the facts that only a professional who deals with finance 24 hours out of 24, it can infuse you. The consultant will help you choose a direction, and take that leap that, with his support (and with time) you won't regret taking.
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