Wrong Beliefs Lead to Losses

Beliefs, like alarm clocks, often remind you.

Sometimes they help you pick yourself back up after a failure.

Thus, you could get through hard times.

But sometimes, they keep you from knowing the truth.

Beliefs about investing could also be an obstacle, especially when they act as belief perseverance biases.

If you have a conservative bias, you may bury your head in the sand and hold on to the previous belief.

You may ignore the new information you've got and make wrong decisions.

You could also have a hindsight bias. You may reflect on an investment and believe you have predicted the outcome.

It may cause overconfidence and lead to unnecessary risks.

Now let's move to two other common belief perseverance biases.

People tend to rely on representatives to make judgments impulsively and ignore a lot of other decisive information.

We call it the representativeness bias.

It means they neglect the base rate or the sample size.

However, the result you got may be a small probability event, which can only cover some of the cases.

Here are examples of investing.

Sometimes you believe a fund manager is excelle

nt because of his performance in the last three years.

However, apart from his ability and experience, his performance could also be attributed to his company, luck, etc.

Also, his three-year performance could be affected by factors like economic cycles and may not be indicative of his long-term performance.

When a company has been profitable for several years, you may expect it to continue.

However, the truth can also be far away from that.

Another example is trends.

Representative information about an uptrend may make you believe the trend will continue, ignore other possibilities, buy assets at high prices, and potentially end up with losses.

The above examples illustrate: always respect the complex market and the unpredictable probability.

It is usually better to judge things logically and statistically than by appearances.

Writing down your thoughts and decisions might help you spot underwater reefs.

Now let's turn to another bias, the confirmation bias.

People seek information confirming their opinions and ignore facts or data supporting a different conclusion.

The information you want might always be available on the market, but your opinions and decisions could be wrong.

Imagine that you are angry with your partner.

You might want to find evidence of his mistakes and shortcomings and turn a blind eye to his good behavior.

When investing, you might pay more attention to positive news about a stock after you buy it and care more about the negative information after you sell it.

This explains why some investors stay bullish, and some stay bearish no matter what is happening in the market.

This bias occurs when you search for, interpret, or recall information.

It makes you obsessed with specific assets and judgments and therefore more likely to lack more diversification, miss chances, or suffer unpredictable risks.

It will help if you change the way you think.

Keep a scanner in your brain. It suggests you research thoroughly, consider all available information, and confirm that you have enough evidence to support your opinion.

Develop your critical thinking just like you have a hammer. It suggests you seek and analyze information that challenges your original opinions.

It also suggests you invite others to challenge you.

Finally, make you question like a cloud which can change its shape.

A question like "Will it be on an uptrend?" is tendentious.

While a question like "How to identify its trend?" is more open-ended.

The latter may help you invest more rationally.

Do the above belief perseverance biases affect your investments? You can stop and think carefully.