Investment bias shows up in a lot of different ways; affecting your ability to make profitable decisions and getting in the way of making smart investment choices.
As a smart investor, it’s important that you learn how to identify the different types of investment bias and arm yourself with the necessary tools to overcome them in your journey toward finding a new stream of passive income.
If you’re curious to learn more about how you can overcome investment bias, as well as find the best investments for doctors, you’re going to benefit from what I’m about to share...
Cognitive bias vs. emotional bias
There is no single way that investment bias presents itself when you’re thinking about making a big investment. Generally speaking, investment bias falls into two different categories: cognitive and emotional.
A cognitive bias refers to the assumptions and beliefs that stand in the way of your decision-making. Usually, a cognitive bias will have to do with the pre-concieved beliefs or prejudices you might have regarding certain situations –– these seem so real to you, even when they’re not, that you let them dictate your thinking and your actions.
On the other hand, the term emotional bias refers to the moments when you let your emotions and feelings get in the way. Since these are so engrained in your system, and they’ve been with you for so long, they can be a lot harder to overcome than a cognitive bias.
The 5 most common types of investment bias
Much like what can happen in medicine, when it comes to choosing the right investment, it’s generally your cognitive bias that kicks in when it comes to making decisions.
However, it’s also your cognitive bias that can cost you a lot of money.
Blindly following what others are doing can, more likely than not, end up in chaos and loss.
The most common examples of cognitive bias preventing you from becoming a smart investor are:
1. Confirmation bias
Defined by Britannica, confirmation bias is the “...tendency to process information by looking for, or interpreting, information that is consistent with one’s existing beliefs.”
In other words, this means that people usually try to find excuses for why something is happening that aligns with what they already believe. And in most cases, confirmation bias usually leads you to miss out on key information.
When it comes to investment opportunities, confirmation bias can harm the way you make your decisions. For example, suppose you’re interested in owning shares in a company. In that case, you’ll do everything you can to ignore all the warning signs that point to trouble because you already believe that the company is doing well.
2. Bandwagon effect
Humans are inherently social creatures. They like to follow the pack, and they feel uncomfortable going against the grain in most situations. This is especially true when it comes to trying to find “smart” and “lucrative” investment opportunities.
Now, although it might be tempting to follow the herd and invest where everyone else is investing, the truth is that blindly following what others are doing can, more likely than not, end up in chaos and loss.
The dot-com bubble and recent crypto market crashes are prime examples of the bandwagon effect. Thousands of people poured money into unfounded companies and currencies just because everyone else was doing the same. The result proved to be a disaster for small and large investors alike and, in the case of crypto, is still unraveling.
3. Loss aversion bias
Nobody likes to lose, right?
In fact, in most instances, people prefer to focus on avoiding loss than they do on actually trying to get a win. And, in the process of trying to avoid loss, they end up missing out on opportunities that could help them succeed!
This is loss aversion bias, and it’s extremely common when it comes to investment.
Although loss aversion bias can help you make less risky decisions, it can also cause you to stagnate on your road to growth. That’s why a balance between avoiding loss and seeking a win is essential if you want to become a smart investor.
4. Anchoring bias
As the name suggests, anchoring bias refers to how certain potential investors get so caught up or “anchored” in a past piece of information that they’re unable to overcome their initial judgment.
If you’re a beginner investor, it might be smarter for you to find someone who actually understands and knows the real estate or stock market before you take the plunge
When it comes to investment, for example, a lot of people usually opt for making decisions based on a share or product’s past performance, expecting it to behave the same way in the future.
Or, in other instances, it might also encourage people to delay selling their investment - which happens a lot in real estate - because they’re so “anchored” to the price they bought it at, clouding their judgment regarding the investment’s true value.
5. Overconfidence bias
Overconfidence bias refers to the tendency that people have of thinking they’re better than they actually are.
In most cases, overconfidence bias can lead people to believe that they’re a lot more knowledgeable or more in the know about certain investment situations than they actually are. This, in turn, leads them to go all-in in certain situations – even ones that won’t bring back a significant or positive return on their investment.
If you’re a beginner investor, it might be smarter for you to find someone who actually understands and knows the real estate or stock market –– possibly a wealth advisor or investment advisor –– and can give you investment advice before you take the plunge.
Tips to help you overcome your investment bias
If you’re looking for a new passive income stream, an investment might be one of the best opportunities for you.
However, it’s not always easy to find the best investment for doctors because of certain situations like advice from colleagues and distrust or a general misunderstanding of how the market behaves.
Here are three quick tips that can help you overcome your investment bias and send you on your way to increasing your wealth the smart way.
1. Rely on objective data, not anecdotal evidence
One of the most important ways you can overcome your investment bias is by focusing solely on objective data instead of hearsay from the people around you.
When it comes to making a smart investment decision, the numbers don’t lie –– but your colleagues’ views can definitely be skewed.
A great place to start is to connect with investment advisors who can walk you through the process and, ultimately, help you make the right decision. Luckily, there are plenty of expert advisors out there who can help you find the right investment –– one that fits your goals, your budget, and your needs –– and can steer you away from any potential bias that might push you in the wrong direction.
Knowledgeable and successful as they might be, your coworkers probably aren’t the best place to go looking for financial advice. After all, doctors aren’t known for being the most financially savvy or professionals.
2. Don’t let your emotions guide the decision-making process
Whether you’re afraid to lose or think you have it all figured out, emotions and investment opportunities simply don’t mix.
Educate yourself, put together a clear investment plan, and try your best to stick to it through the good times and the bad. When you create a clear roadmap for yourself, you’ll be a lot less likely to venture off-course because you woke up filled with doubt and fear on any given morning.
Being aware of your biases is the first step in making smarter decisions that can help increase your wealth and help you generate a stream of passive income for years to come.
This includes creating and sticking to a budget, making an effort to take some risks, and staying up to date with how the market is behaving (such as keeping an eye on the S&P 500).
3. Stay open to new information
Forget sticking with yesterday’s news –– they are no indication of what will happen today or tomorrow.
Even if the new information doesn’t align with your initial beliefs, it’s important to remain open and receptive. The market can change like the weather, and it won’t do you any good if you choose to ignore these possible changes because you’re so set in your old ways.
Investment bias is easier to overcome than you imagine
When it comes to being a smart investor, the truth is that investment biases can be a lot easier to overcome than you imagine. It just takes a little more care and patience – which, as a physician, are two things you’re already familiar with!