BEHAVIOURAL BIASES

the history goes, it is believed that we all are rational human AS beings and strive to maximize our wealth prudently. However, when it comes to stock markets, it is noted that at many instances emotions and psychology influence our decisions, causing us to behave in unpredictable and irrational ways.

- Harsh Saraswat

Behavioural finance is a new field of finance, which combines psychology, economics and finance to find explanations about the irrational decisions made by people in financial markets. Few of the significant biases which can be noticed very vividly in markets are:

Confirmation Bias 

This is one of the most common biases we will find in the markets. It is basically a tendency to search for reasons and information that confirms one’s beliefs or hypotheses. It mostly happens when a trader is holding on to a loss position, when a trader takes a position for a reason and that reason doesn’t work out, then such trader looks for more reasons to justify his position so that he can hold on to that position. Such Bias intensifies when a trader is holding on to a loss position as booking out a loss is a much tougher job psychologically. This below picture explains the situation quiet well. If we extend this bias, it also gives rise to In-group bias. It is a tendency where we surround ourselves with those who share the similar takes on our outlook. Not only does this provide a false sense of security in our individual viewpoints, it makes us suspicious-or angry-with outsiders who dare to question how we feel.

Loss Aversion Bias