In the world of financial investments, an individual's knowledge and opinion plays a vital role. If the investor is well-informed and unbiased in opinion, better the chances of maximizing the ROI. But investors are seldom fool-proof in their rationality, invariably inflicted with behavioral patterns that affect the quality of their investment decisions. A few common causes that breed biases and prejudices are cited below:
: Many people, always apprehensive of their lack of financial knowledge, end up following what others are doing. They don’t trust their conviction and follow the herd but, more often than not, this mentality puts them in deep trouble. Losses from market crashes are one of the most common consequences of this borrowed wisdom.
: In today’s internet era, information overload is an unavoidable reality. Be it equity, real estate or commodities, the internet is flooded with loads of perplexing information. The confusion leads to hasty and error-prone decisions. For example, a person looking to invest in a mutual fund scheme will be overwhelmed with the sheer number of fund houses offering multiple schemes and the plethora of expert opinion. In the end, he/she often takes a decision out of sheer exhaustion.
Hope against hope
: It is a proven fact that nobody likes incurring losses, but it is another fact that a majority of investors choose to hold on to their losses instead of mitigating or arresting them at the first given opportunity. Stock market investors knowingly reject all sell recommendations on fundamentally weak stocks and hold on in the vain hope of recovering losses. They often suffer costly exits in the end but only after having booked astronomically high losses.