The Little Book of Behavioral Investing
Jan 2023
3 min read
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1. The endowment effect says that once you own something you start to place a higher value on it than others would.
2. When people see information in a format with which they are familiar, they will unquestioningly process it.
3. The most striking example of overconfidence among professionals is their general belief that they can outsmart everyone else—effectively, get in before everyone else and get out before the herd dashes for the exit.
4. Confirmatory bias is all too common a mistake when it comes to investing & other spheres as well. In fact, it transpires that we are twice as likely to look for information that agrees with us most. We need to learn to look for evidence that would prove our own analysis wrong.
5. What is the root cause of conservatism? The answer seems to lie in the “sunk cost” fallacy. We tend to hang onto our views too long simply because we spent time and effort in coming up with those views in the first place.
6. Self-attribution bias is our habit of attributing good outcomes to our skill, while blaming bad outcomes on something else. Only by cross-referencing our decisions & the reasons for those decisions with the outcomes, can we hope to understand when we are lucky & skilful.
7. People often judge a past decision by its ultimate outcome rather than basing it on the quality of the decision at the time it was made, given what was known at the time. This is outcome bias.
8. One of the most common reasons for holding onto a stock is the belief that it will bounce back subsequently. This could be motivated by any number of potential psychological flaws ranging from over-optimism, overconfidence, to self-attribution bias.
9. Investors must concentrate on process. Process is the set of rules that govern how we go about investing. Some of the world’s greatest investors have integrated measures into the way in which they approach investment to act as a guard against mindless investing.
10. How to be a contrarian: 1. Have the courage to be different. 2. Be a critical thinker. 3. Have the perseverance and grit to stick to your principles.
11. We should do our investment research when we are in a cold, rational state & when nothing much is happening in the markets & then pre-commit to following our own analysis & action steps.
12. The tendency of overrate our abilities is amplified by the illusion of control—we think we can influence an outcome.
13. We don’t need to outsmart everyone else. We need to stick to our investment discipline, ignore the actions of others, and stop listening to experts.
14. We shouldn’t try to change everything in one swoop, as we will fail. Working out which biases you suffer from the most, and addressing these first, should help improve returns.
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PGIM India Asset Management Private Limited
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This is an Investor Education and Awareness Initiative by PGIM India Mutual Fund.
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All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindiamf.com/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
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