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Hello dear readers,
Investing, especially in cryptocurrencies, has become very popular in recent years. Many people associate it with financial freedom. Some promote it, others report on their success, and some are still dreaming about it. More than ever, people nowadays seem to be daring (perhaps also out of necessity) to invest their money in cryptocurrencies, ETFs, stocks, and other assets. But is it really as easy and straightforward as it seems and is often suggested, or is there more risk involved than we want to admit?
Today, I want to introduce you to some so-called psychological biases that we all can be susceptible to and that can sometimes lead us to make wrong decisions. Additionally, you will learn how you can potentially protect yourself from them and avoid fatal decisions and losses.
What are psychological biases, and how can I protect myself from them?
Psychological biases are systematic errors or distortions in human perception that can lead to irrational decisions. These biases can also arise in investment decisions and lead to risky investments.
Here are some common psychological biases and possible protection strategies:
- Confirmation Bias:
This bias occurs when investors selectively seek or interpret information to confirm their existing beliefs. It can lead investors to prefer risky investments that support their optimistic assumptions.
Protection Strategy:
To counter this bias, investors should consciously seek opposing opinions and negative information about a potential investment. Thorough and objective research is essential to make informed decisions.
- Overconfidence Bias:
This bias leads investors to overestimate their abilities and believe they can make better decisions than the average person. They might engage in risky investments because they are convinced they will succeed.
Protection Strategy:
The best countermeasure is honest self-assessment. Investors should recognize their own limits and levels of experience and may seek the assistance of financial advisors to make better decisions or first educate themselves and engage intensively in the subject.
- Availability Heuristic:
This heuristic is based on the tendency to rely on information that is readily available or easily retrievable when making decisions. If investors frequently hear about successful risky investments, they might be tempted to make similar decisions without adequately considering the potential risks.
Protection Strategy:
Investors should not rely solely on public opinion or media reports. They should take the time to conduct thorough research and familiarize themselves with underlying data and facts before making an investment decision.
- Herd Mentality:
Herd behavior occurs when investors tend to follow the decisions of others instead of thinking independently. This can lead to investors entering overheated markets or impulsively reacting to trends without considering the long-term consequences. This is particularly relevant in today's age when algorithms keep us in our own "bubble."
Protection Strategy:
Investors should not be influenced by mass behavior and should conduct their own research, even outside of their own "bubble" that keeps confirming their beliefs. It is advisable to pursue a balanced investment strategy and not simply follow current trends.
- Loss Aversion:
This bias describes the tendency of investors to fear losses more than potential gains. It can lead investors to avoid risky investments even if the prospect of profits is promising.
Protection Strategy:
To overcome loss aversion, investors should set clear investment goals and define their risk tolerance. Understanding that losses are part of the investment process can help reduce emotional decisions.
Overall, it is important for investors to be aware of their own psychological biases and develop strategies to overcome them. A combination of thorough research, rational analysis, honest self-reflection, and clear investment goals can contribute to making investment decisions on more solid foundations. Including professional financial advisors can also be helpful in obtaining objective and informed insights.
What is your own experience with psychological bias?
Were you able to recognize some in yourself?
I'm curious, write your experiences in the comments.
Yours, SoulDis