Premium Essay

Physiological Biases That Make Investors Become Irrational

In: Business and Management

Submitted By Daf92
Words 1085
Pages 5
Every single investment requires decision making. The result of decision making without certain planning might not end well. One cannot simply make a decision by relying on his/her personal resources as the decision may give an impact to the investments. It is difficult to make decision which is related to the field of investments. Investors have to consider their risks, market condition, rate of return, and others in making their investment portfolio. However, there are many possible physiological biases that make investors become irrational thus making bad decisions for the investment.
Illusion of Money
This bias refers to investors making decisions based upon nominal terms and not real terms. It means that the confusion between the real and the actual changes in money. Why will this happen? This will happen because the investor lack of the knowledge in finance. They only will see the money that can get by them but never accounting the inflation and the time value of money. As an example, an investor invests their money in a bond and it will yield 10% in the future. It sound attractive but we are get nothing when the inflation are also 10%. This kind of investment will mislead the investor that lack of general knowledge in finance becomes irrational thus making bad decision for the investment.
Overconfidence
First that is overconfidence. Overconfidence obviously mean in overtrading or switching between investment accounts in an effort to increase returns. Overtrading will lead to sell losers at low prices and buy winners at high prices. However, it cost high transaction costs, high tax liabilities and the possible of selling out of the market just when investment performance rises. There is a solution for this, first investors should measure carefully keep tracking of own investment returns and trading costs. Investors should consider their expectation for…...

Similar Documents

Premium Essay

Biases

...In the professional field of psychology, social biases have become an evident part of society. The United States of America has played an important part of how each individual seeks the world and portrays diverse views. Within each culture, a melting pot affect has taken place. Every individual has been brought into the world with different views and how to encounter the world’s greatest issue with prejudices, discrimination, stereotypes. Race, gender, age, ethnicity, and religion are prime examples of biases. As a reader, one may envision prejudice, discrimination, and stereotype are the same words just used in different context; however, the definitions illustrate the opposite. According to Fiske (2010), all facets of biases include category-based responses, which are directed towards other individuals (Fiske, 2010). Social biases can negatively affect an individual’s life, employment status, and outlook and quality of life. It is important to understand and research the many reasons why social biases are negative and how to conquer and modify one’s behavior to better prepare for the future. Define the concepts of prejudice, stereotyping, and discrimination According to Myers (2005), social biases are a typical occurrence in any type of group collaboration that involves negative evaluations of each group (Meyer, 2005). Many social psychologists frequently associate cognition to stereotype, affect to prejudice, and behavioral to discrimination. The first......

Words: 1161 - Pages: 5

Free Essay

Investor Irrationality and Self Defeating Behavior

...A Critical Analysis of: Investor Irrationality and Self-Defeating Behavior FIN645 Introduction For many years, finance traditionalists have held on to the theory that markets are efficient and that prices correctly reflect the information available to the market as a whole. This has come to be known as the efficient market hypothesis which was originally postulated by Eugene Fama in 1965. After a thorough statistical study of the movements of investment prices Fama concluded that “such movements were essentially random and unpredictable” (Shefrin p.75). Fama pointed out that “in an efficient market, prices correspond to intrinsic (or fundamental) value” (Shefrin p.75). In short, what the theory concludes is that it is impossible to beat the market; that no investor can ever purchase undervalued stocks or sell stocks at inflated prices. The market will always correct itself by incorporating all relevant information into the price of a security thus eliminating an individual investor’s ability to outperform. EMH has grown to become a cornerstone of financial theory and is still applied by many traditionalists when attempting to explain the behavior of financial markets. While there is much evidence in support of this theory there is an equal amount dissention. There are many who argue that there is ample evidence available that counters the central ideas of EMH and demonstrate its shortcomings such as: individuals who have shown that they can......

Words: 2510 - Pages: 11

Premium Essay

David Hirshleifer's Investor Psychology and Asset Pricing

...I. JUDGMENT and DECISION BIASES In the first section of the survey, psychological effects which are relevant for securities markets are defined. These effects mostly derive from common roots. Since it is almost impossible to analyze all the given data, rules of thumbs are preferred such as algorithmic, heuristics and mental modules. Heuristics must be applied to appropriate problems and cases so that they can be effective. There have been debates between both economists and psychologists on how heuristics do. Most of the economists believe in the fact that errors are independent across individual investors. The idea ends up with the equilibrium point and correction. However people mostly share similar heuristics gained from experience. Human mind is not designed solely to make good decisions but also to experience pleasantness. Individuals believe that they are better than they actually are. Also decisions are affected by feelings and mood of decision maker individuals. People can learn from past experiences and failures. However learning is hard and self-deception makes people realize their success more than failures and losses. Many (though not all) of the cognitive biases are stronger for individuals with low cognitive ability or skills than for those with high ability or skills, consistent with biases being genuine errors. A. Heuristic Simplification A.1 Attention/Memory/Ease-of-processing effects Lack of full attention, limitations on memory...

Words: 4287 - Pages: 18

Premium Essay

Sunk Costs and Biases

...Sunk Costs and Biases I believe that all personal bias comes with a common set of language and behaviors that cross racial, ethnic and gender based structures. Bias is created by a real life experience and contains both a mindset and associated behavioral characteristics. Personal bias is infused in every organization through the connection of the people that provide the services. Biases result when an individual inappropriately applies a heuristic, (Bazerman and Moore, 2012). Researchers have found that people, rely on a number of simplifying strategies, or rules of thumb, when making decisions. These simplifying strategies are called heuristics. The four main heuristics are availability, confirmation, representativeness and affect. With heuristics choice making comes personal bias which is mixed with organizational bias to create another level of systemic biased behavioral impacts. In DPS we are making decisions that impact children from a biased perspective that is not always about students first. The biases range from who is invited to present to how we structure our organizational communication and problem solving processes. Embedded within organizational culture is a bias called sunk cost. Sunk cost bias is about persisting with bad decisions due to our irrational attachment to costs that we cannot recover has become so common that you can find them just about anywhere, (LiteMind). That’s the sunk......

Words: 827 - Pages: 4

Premium Essay

Predictably Irrational

...Matthew Ellis Marketing Management Prof Pashkevich December 4, 2013 In the book predictably irrational, author Dan Ariely explains and demonstrates through witty experiments the fact that although we may think we are always making rational, well thought out decisions, there are actually hidden factors that cloud our ability to make the right decisions. He goes on to discuss how our emotions, social norms, and other hidden forces can change our rational intentions into extremely irrational Behaviors. The interesting part is that these irrational behaviors seem like the correct thing to do at the time and we use these past experiences to make future decisions, and therefore if we are not very careful we can fall into a never ending train of irrational decisions. Dan Ariely makes it quite apparent that this behavior takes place in everyday life even though we may not know it and hopes that his research can open our eyes to this fact and help us to avoid making irrational choices. He challenges the traditional assumption that the economic man uses rational thought to make decisions and challenges his readers to rethink the way they view the simple, everyday choices made on a daily basis. After reading the book, he makes it obvious that we all unknowingly act predictably irrational, however he gives us the tools to overcome this and think and behave in a rational manner. Some of the major points discussed in the book include the truth about making decisions based on......

Words: 1621 - Pages: 7

Premium Essay

Irrational Side of Change Mgt

...The irrational side of change management 101 Organization Practice The irrational side of change management Most change programs fail, but the odds of success can be greatly improved by taking into account these counterintuitive insights about how employees interpret their environment and choose to act. Carolyn Aiken and Scott Keller In 1996, John Kotter published Leading Change. Considered by many to be the seminal work in the field of change management, Kotter’s research revealed that only 30 percent of change programs succeed. Since the book’s release, literally thousands of books and journal articles have been published on the topic, and courses dedicated to managing change are now part of many major MBA programs. Yet in 2008, a McKinsey survey of 3,199 executives around the world found, as Kotter did, that only one transformation in three succeeds. Other studies over the past ten years reveal remarkably similar results. It seems that, despite prolific output, the field of change management hasn’t led to more successful change programs. It also hasn’t helped that most academics and practitioners now agree on the building blocks for influencing employee attitudes and management behavior. McKinsey’s Emily Lawson and Colin Price provided a holistic perspective in “The psychology of change management,”1 which suggests that four basic conditions are necessary before employees will change their behavior: a) a compelling story, because employees must see the......

Words: 3755 - Pages: 16

Premium Essay

Behavioural Biases of Mutual Fund Investor

... Behavioral biases of mutual fund investors$ Warren Bailey a,n, Alok Kumar b, David Ng c,d a Cornell University, Johnson Graduate School of Management, USA University of Miami, School of Business Administration, USA c Cornell University, USA d University of Pennsylvania, Wharton School, USA b a r t i c l e i n f o Article history: Received 19 October 2009 Received in revised form 6 July 2010 Accepted 9 July 2010 Available online 27 May 2011 JEL classification: G11 D03 D14 Keywords: Individual investors Mutual funds Trend chasing Behavioral biases Factor analysis abstract We examine the effect of behavioral biases on the mutual fund choices of a large sample of US discount brokerage investors using new measures of attention to news, tax awareness, and fund-level familiarity bias, in addition to behavioral and demographic characteristics of earlier studies. Behaviorally biased investors typically make poor decisions about fund style and expenses, trading frequency, and timing, resulting in poor performance. Furthermore, trend chasing appears related to behavioral biases, rather than to rationally inferring managerial skill from past performance. Factor analysis suggests that biased investors often conform to stereotypes that can be characterized as Gambler, Smart, Overconfident, Narrow Framer, and Mature. & 2011 Elsevier B.V. All rights reserved. 1. Introduction Previous studies of behavioral biases in the investment decisions of individual investors focus on......

Words: 25255 - Pages: 102

Premium Essay

Biases

...What is a decision? It can be defined as, "the act of reaching a conclusion or making up one's mind. Generally, a decision is a choice that an individual makes. Decision-making is leading characteristics of leader. Managers are paid so that they reach possible solutions by making decision, and it is an integral part of their daily duties. The consequences of decisions can be ranged from minor results to career threatening. In spite of the results, it is significant to understand when a decision has to be made and the best way to do it. A rational decision making model provides a structured, sequenced and wise way to decision making and it is based on the logic of optimal choice that would maximize the profit. Using such approach helps to ensure discipline and consistency that is built into decision making process. As the word rational tells us, this approach brings logic and order to decision making. However, in Administrative decision making model people with different levels of motivation have no time to make decisions, therefore they usually try to find short and easy ways to problems. Under the administrative model, decision maker never tries to optimize but instead satisfices and treats objectives as loose constraints. While rational model requires optimization, choosing the alternative with highest value, satisficing, administrative model, requires finding the first option with an acceptable value. For example, let`s assume that I had a house I wanted to sell. If I......

Words: 1533 - Pages: 7

Premium Essay

The Intelligent Investor

... THE INTELLIGENT INVESTOR A BOOK OF PRACTICAL COUNSEL REVISED EDITION B E NJAM I N G RAHAM Updated with New Commentary by Jason Zweig To E.M.G. Through chances various, through all vicissitudes, we make our way. . . . Aeneid Contents Epigraph iii Preface to the Fourth Edition, by Warren E. Buffett viii A Note About Benjamin Graham, by Jason Zweig x Introduction: What This Book Expects to Accomplish COMMENTARY ON THE INTRODUCTION 1. 1 12 35 The Investor and Inflation 47 COMMENTARY ON CHAPTER 2 3. 18 COMMENTARY ON CHAPTER 1 2. Investment versus Speculation: Results to Be Expected by the Intelligent Investor 58 65 COMMENTARY ON CHAPTER 3 4. A Century of Stock-Market History: The Level of Stock Prices in Early 1972 80 General Portfolio Policy: The Defensive Investor 88 COMMENTARY ON CHAPTER 4 5. 101 124 Portfolio Policy for the Enterprising Investor: Negative Approach 133 COMMENTARY ON CHAPTER 6 7. 112 COMMENTARY ON CHAPTER 5 6. The Defensive Investor and Common Stocks 145 iv 155 COMMENTARY ON CHAPTER 7 8. Portfolio Policy for the Enterprising Investor: The Positive Side 179 The Investor and Market Fluctuations 188 v Contents COMMENTARY ON CHAPTER 8 9. Investing in Investment Funds COMMENTARY ON CHAPTER 9 213 226 242 10. The Investor and His Advisers 257 COMMENTARY ON CHAPTER 10 272 11....

Words: 224262 - Pages: 898

Free Essay

Physiological Disorders

...Physiological Disorders Nature and diagnosis of physiological Disorders In this assignment I am going to be creating a workbook for level 3 students who study health and social care course which can help them with their studies and support I will be talking about two types of disorders which are Diabetes Mellitus Type 2 and Cerebral Vascular Accident (CVA). P1 Explain the nature of two named physiological disorders. The two types of physiological disorders I am going to be talking about are Diabetes Mellitus Type 2 and Cerebral Vascular Accident (CVA). I’m going to start by naming the physiological disorder with a definition for the both. Diabetes Mellitus Type 2: This type of physiological disorder is the most common form of diabetes. If an individual was to have this type of disorder the body wouldn’t be using insulin properly. This is called insulin resistance, because at first the pancreas would have made extra insulin which would have made up for it. Type 2 diabetes was once known as adult onset or noninsulin dependent Diabetes, this is a very chronic condition for an individual to go through. So anyone having this physiological disorder will have conditions which will affect their body metabolizes sugar. Glucose is very significant source of energy which your body need. If you have type 2 diabetes your body will either resists the effects of insulin this is a hormone which’s help regulate the movements of the sugars which go into your cells, or it doesn’t......

Words: 1484 - Pages: 6

Premium Essay

“How Effective Communications Can Make a Business Enterprise Become Known”

...“How Effective Communications Can Make a Business Enterprise Become Known” People go to malls for numerous reasons. One of it is because of its convenience. Malls are able to provide people a wide variety of stores as well as shopping opportunities. It is also for having entertainment and leisure. People nowadays, employees or students, have a tough time in work or studies and going to malls has been one of their ways to relax and release all the stress. Located in a tropical country and experiencing a very hot weather, Filipinos often go to malls because they bring a refreshing ambiance, enabling visitors to rest and enjoy at the same time. It is also a place to bond with family and friends. I’m pretty sure that most people know what SM is. It is supervised by SM Prime Holdings, Inc. and it is, by far, the largest shopping mall and retail operator in the Philippines. It develops SM Supermalls with its famous SM Department Store. Like all things, this business did not start like magic or in a blink of an eye. It was rooted from scratch and has developed through hard work. The owner, Henry Sy, Sr. started his business with a shoe store called Shoe Mart. He had to travel back and forth to New York and Manila for 40 hours via propeller plane in order to ......

Words: 1138 - Pages: 5

Premium Essay

Investor Behaviour

...SHRI RAM COLLEGE OF COMMERCE A STUDY ON FACTORS INFLUENCING INDIVIDUAL INVESTOR BEHAVIOUR Project work Paper No. – CH 6.3 (b) (Submitted for Partial Fulfillment Towards Requirement of B.COM (HONS.) Course) Ashvi Mittal 12BC136 12072204129 E-21 2014-15 UNDER THE SUPERVISION OF Miss Ankita Tomar Assistant Professor Department of Commerce Shri Ram College of Commerce University of Delhi 1       DECLARATION BY STUDENT This is to certify that the material embodied in this study entitled “A STUDY ON FACTORS INFLUENCING INDIVIDUAL INVESTOR BEHAVIOUR” is based on my own research work and my indebtedness to other work/publications has been acknowledged at the relevant places. This study has not been submitted elsewhere either wholly or in part for award of any degree. Ashvi Mittal B.Com(H) Section-E 12BC136 2       DECLARATION BY TEACHER INCHARGE This is to certify that the project titled “A STUDY ON FACTORS INFLUENCING INDIVIDUAL INVESTOR BEHAVIOUR” done by Ashvi Mittal is a part of her academic curriculum for the degree of B.Com(H). It has no commercial implication and is done only for academic purpose. Mrs Aruna Jha Miss Ankita Tomar (Teacher in- charge’s name and signature) signature) 3       (Mentor’s name and Signature) ACKNOWLEDGEMENT I feel great pleasure in expressing my gratitude to my mentor Miss Ankita Tomar of Commerce Department, Shri Ram College......

Words: 6505 - Pages: 27

Free Essay

The Right to Eat Whole Grains Make You Become Young

...The Right to Eat Whole Grains Make You Become Young In recent years, forced health needs, people come to realize the importance of human demand for coarse grains, people began to know that life is good, but can not always eat whole grains. But according to nutrition experts say: good light can not know whole grains, eat whole grains, due to age and to know how to row. Whole grains rich in fiber Because whole grains contain a lot of cellulose, cellulose itself will produce mechanical colorectal stimulation, promote bowel movements, stool soft flow, which for the prevention of colon cancer and high blood lipids due to the result of cardiovascular disease is very favorable of. 25 to 35 years age group 25 to 35 years of age this man, long-term excessive consumption of high fiber foods will make people blocked the protein supplement, a substantial reduction in fat intake, micronutrient deficiencies, as well as causing the bones, heart, blood and other organ functions damage, reduce the body's immunity. Therefore, the number of days a week to eat whole grains do not eat more than three days, or drink some coarse grains secret agents of drinks is also more appropriate. 35 to 45 years old age group This age group 35 to 45 years old, began to slow metabolic rate, you should eat less high sweetness foods fit to eat a variety of dried fruits, coarse grains, beans, fresh fruit. People in this age group recommends eating less than equal to twenty grams a day medlar, medlar nourishing......

Words: 424 - Pages: 2

Premium Essay

Biases

...Bias comes in many forms, including race, age, gender, and ethnicity and can be universal or location specific (Fiske, 2010). Biased individuals believe the biases they are applying to others are right without regard for the truth (Fiske). Prejudice, stereotyping, and discrimination are all somewhat similar; however, they are also very different. Each form of bias is performed by one individual or group of individuals judging another individual or group of individuals prior to obtaining factual knowledge of the individual or group (Fiske). However, each form of bias is performed with a different focus. An individual behaves in a prejudicial manner when he or she has an emotional reaction to another individual or group of individuals based on preconceived ideas about the individual or group (Fiske, 2010). For example, a White individual refusing to drink from the same water fountain as a Black individual based solely on racial bias represents prejudice by the White individual. The White individual has no factual information to support not drinking from the same water fountain; however, he or she has a preconceived idea of the Black individual and therefore refuses to use the same drinking fountain. According to Fiske (2010), stereotyping is the application of an individual’s own thoughts, beliefs, and expectations onto other individuals without first obtaining factual knowledge about the individual(s). Many times, stereotypes are created after multiple occurrences of a......

Words: 1243 - Pages: 5

Premium Essay

Social Biases

...Social Biases University of Phoenix Dr. Kinsey August 20, 2012 Social Biases In today’s society social biases can be a problem because many people may look down on another person or group. People and groups can look down on another person believing he or she is better than the other. This type of social influence that some groups may have can generate common biases. Social biases can hinder interaction between people and become very damaging to people (Fiske, 2010). “Just as aggression research reveals the basic social psychology of processes that can prove deadly, the research on bias reveals processes that are demonstrably unhealthy and sometimes deadly for both agents and targets of bias” (Fiske, 2010, p. 428). Characterizing a specific way of thinking or the way a person is being view is sometimes called bias. People’s behavior and attitude which may be influenced by judgment can be displayed as bias. Many people do not realize they are bias, because it is not common to know you the person is bias. Others may identify a person being bias but one may not realize they are bias. In this paper I will define the concept of prejudice, stereotyping, and discrimination. Explain the differences between subtle and blatant bias, and identify some common bias and ways to prevent bias in today’s society. Concept of Social Bias Social Bias is “prejudice attitudes toward particular groups, races, sexes, or religions, including the conscious or......

Words: 1305 - Pages: 6