Overcoming Investment Bias: Make Informed Decisions!

Updated: Sep 16

Investment biases can often lead to poor decision-making. Loss aversion, overconfidence, anchoring, recency bias, and confirmation bias can reduce profits or even result in losses. How can we minimize these biases?

Types of Investment Biases and Their Solutions

Loss Aversion

Gains and losses are a normal part of investing. However, some individuals are reluctant to accept losses, causing them to hold onto their investments for too long in hopes of recovery, when it might be wiser to cut their losses.

Solutions:

Diversify investments to reduce the emotional impact of a poorly performing asset.
Set realistic stop-loss rules and adhere to them.
Regularly rebalance your portfolio every 3-6 months or when asset allocation deviates from the plan.

Overconfidence

Being overly confident in selecting assets or predicting market movements can lead to overtrading, ignoring fundamental investment principles, and taking unnecessary risks.

Solutions:

Rely on data-driven strategies and regularly review asset performance.
Limit trading frequency to what is necessary (e.g., 1-3 times a month).
Record impulsive transactions for later evaluation.

Anchoring

Individuals with an anchoring bias are reluctant to seek new information and tend to focus on a specific piece of information as a reference point, such as the purchase price of an asset, even if it's no longer relevant.

Solutions:

Focus on fair value, valuation, or future prospects rather than purchase price.
Create a fundamental checklist that is regularly updated according to macroeconomic and microeconomic conditions.
Reflect on the reasons for buying and target prices when entering a position, and compare them to current reality.

Recency & Confirmation Bias

Recency bias involves placing too much emphasis on recent trends without considering past events or long-term data. Confirmation bias is the tendency to only seek information that supports personal opinions and ignore contradictory information. This can lead to impulsive decision-making, missed opportunities, and failure to recognize warning signs.

Solutions:

Focus on historical performance and long-term market trends for a more balanced perspective.
Actively seek opposing viewpoints (counterarguments) and review diverse sources of information.
Remain open to new, credible information that may challenge existing views.

By understanding and addressing these biases, investors can make more informed decisions and improve their investment outcomes.

Disclaimer: The content is made for educational purposes, not a recommendation to buy or sell a particular stock. PT KAF Sekuritas Indonesia is licensed and supervised by the Financial Services Authority (OJK).