BREAKING BIAS: Conquering Cognitive Biases in Investing

 

I read the book Thinking, Fast and Slow written by Nobel laureate Daniel Kahneman in 2019. I started my investing journey in March 2020, after the stock market crash. Despite knowing many of the cognitive biases we are prone to when investing in the stock market, I made the same mistakes. Experiencing it in real time is a whole different matter compared to just reading about it. Of course, we can't learn everything from experience; sometimes, experience comes with a heavy cost, from which we cannot fully recover. I will share some of the cognitive biases I encountered during my investing journey and how I overcame them.

 

The first and foremost cognitive bias I faced was Anchor Bias.

Anchor Bias is the tendency of the human mind to fixate on a particular number and make decisions based around it. In my stock market journey, I got anchored to stock prices multiple times. For example, I first bought Infosys stock at ₹600 and became anchored to that price. I kept waiting for the stock to return to the ₹600 range before buying again, but it never came.

Fixation: Instead of anchoring myself to the price, I started focusing on the value of the company. I asked myself if the stock's value was truly justified by its earnings. Over time, I realized that while the valuation remained similar, the price increased. Eventually, I decided to buy it at the higher price.

The second cognitive bias I faced was Hindsight Bias.

Hindsight bias is the tendency of the human mind to believe we knew everything before an event happened, when in reality, we only form that belief after the event occurs. Let me explain how I got fooled by this. I used to add some of my favorite stocks to my watchlist but didn’t buy them. A few stocks from my watchlist soared, and I thought, "I knew it was going to perform well."

The question is: if I really knew these stocks were going to perform well, why didn’t I invest in them? That’s how hindsight bias works.

Fixation: Rather than concluding things based on the outcome, I focused on the process and data I used for decision-making. I believe the outcome is determined by many factors, not solely by my actions.

 The third cognitive bias I faced was Availability Bias.

Availability bias is the tendency of the human mind to conclude that we know all the details, when in reality, we know very little about it. I used to watch the news and gather information about companies from websites, thinking I knew almost everything about them. But in reality, what’s shown in the news and what’s available on the internet is just the tip of the iceberg.

Fixation: I realized that my judgment could be influenced by what is most easily remembered or what I’ve encountered most recently. So, I made an effort to evaluate information more thoroughly and avoid relying solely on the most immediate or obvious examples.

Conclusion: There are many more biases, like Overconfidence Bias, Loss Aversion, and Confirmation Bias, that I will discuss in upcoming blog post. The key takeaway from this journey is that, while knowing about these biases is essential, applying that knowledge in real-time is far more challenging. It's a continuous learning process. Investing is not just about numbers and market analysis—it's about managing our minds and emotions to make clear, thoughtful choices.