Here’s How to Find and Avoid the Top Psychological Illusions While Investing
The art of investing is full of decision making. Given the complex nature of our thought processes, often these decisions knowingly or unknowingly get influenced by certain factors which could prove fatal. Therefore, it is vital to identify the traps and keep them at bay at the time of decision making. Let us have a look at the most common of them:
- The Anchoring Illusion
People or investors struck by this illusion tend to follow the conventional thought process. For instance, you might decide that a particular company’s stock will perform well only because it has been facing success in the recent past. However, you might fail to see the performance of the company during some vital junctures, suppose, if there is a general market instability.
The way to avoid this form of thinking is to keep your mind open and flexible. That is done by acquiring more and more information about the investment step you are taking and knowing more about the factors affecting them.
- The Sunk Cost Trap
This is one of the most dangerous forms of psychological illusion. If you are in the sunk cost trap, you are unable to comprehend or learn that your previous choices have been wrong and bad, if they really were. This makes it extremely difficult to come out of an investment if it is dipping.
To avoid this, it is important to review decision time to time and most importantly, not to attach to any decision emotionally.
- The Confirmation Trap
People facing the confirmation trap tend to follow and continue the mistake what others are doing or had done. In order to avoid following some decisions made by others blindly, it is vital to get fresh words and suggestions into the matter. Only then the picture would open up further.
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- The Blindness Trap
If you know instinctively or through facts that the investment you have made is at some risk and you do nothing about it from now, you are blind to the situation. This is one of the most common problems investors face as many of them are not flexible to change.
- Superiority Trap
No discipline rewards over-confidence and over flowing self – pride. In fact, the investment industry punishes hard for such a quality. In this trap, people think they are the know-all of the market and they would not require any advice which may actually turn critical to them. As a result, they trust their instincts too much and divert from what the actual facts and figures are.
Our psychology is a strange thing, it can be as rigid as you make it or even as flexible as you wish it to be. It all needs realization at a consciousness levels. If that does not happen, the blindness, wrong ideas and self – pride can only create more losses.