Pshycological Biases in Investment Management – First Theme – Heuristic Driven Biases

a) Representativeness:

This is put simply, stereotyping. It happens when current/potential decisions and/or expectations are based on some past experiences.  E.g. All green firms are good investments, Strong past performance is indicative of strong future performance, e.t.c.

b) Over-Confidence:

Placing too much confidence in one’s abilities (to forecast) often makes the confidence intervals too narrow. This tends to lead to surprises.

c) Anchoring and Adjustment:

This refers to making an orignal forecast and not revising it fully in the light of the newly available information, thereby anchoring on to the original projections. This also tend to lead to surprises which are in the direction of the newly available information. If for example there was new positive info made available but not fully incorporated, it will lead to a positive surprise and vice versa.

d) Aversion to Ambiguity:

It can be explained as “fear of the unknown”. Investors (and even people in general)  prefer to have some sort of assurance. They feel comfortable having something to “rely” on even if it is the forecasts and projections which though are not certain gives a sense of lesser ambiguity. When faced with uncertainty, investors tend to stay away. This can result in market inefficiency as we will discover later.

One thought on “Pshycological Biases in Investment Management – First Theme – Heuristic Driven Biases

  1. is it possible to see muslim have their own technology??
    we should have our own browser,windows etc..hope we will have it someday..insyaallah..

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