Common Behavioral Biases That Distort Investment Decisions

Behavioral biases are predictable thinking errors that can distort investment judgment. They affect how investors interpret information, evaluate risk, react to gains and losses, and respond to the behavior of other market participants.

This section covers four of the most common biases seen in beginning and experienced investors alike. Understanding them does not remove them automatically, but it makes them easier to detect before they become costly portfolio mistakes.

Section Lessons

• Overconfidence Bias
• Herd Behavior
• Loss Aversion
• Confirmation Bias

In this section

• Overconfidence Bias and Its Effect on Investment Decisions
  Learn how overconfidence causes investors to overestimate skill, underestimate risk, and trade with too much certainty.
• Herd Behavior and Following the Crowd in Markets
  Learn why investors follow the crowd, how herd behavior distorts prices, and what disciplined investors do differently.
• Loss Aversion and the Difficulty of Realizing Losses
  Learn why investors feel losses more intensely than gains and how that can distort selling, risk, and portfolio decisions.
• Confirmation Bias and Selective Use of Investment Evidence
  Learn how investors seek evidence that supports an existing view and how that can weaken analysis and portfolio discipline.