Modules for Investors
Investment Biases - Part 1
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Glossary of Investment Analysis Terms & Definitions
1. Cognitive bias: involves making decisions based on established concepts that may or may not be accurate. Think of a cognitive bias as a rule that may or may not be factual.
2. Emotional bias: are usually formed immediately, based on one's personal feelings when making a decision. These can be deeply influenced by personal experiences, which also influence decision making.
3. Endowment bias: It is an idea that states that what we have, or what we own, is more valuable than something we do not have.
4. Confirmation bias: is the bias when an investor seeks the same information to support his ideas or concepts, or argues based on half-baked information to justify his bias.
5. Loss Prevention Bias: The investor prefers to focus on finance management most safely and does not want to suffer losses in the market.
6. Information bias:. As an investor, most information can cause hundreds of doubts about investment plans and easily confuse them when choosing an investment. This overload of information can become prejudicial to the investor.
7. Profitable bias: is a pattern of finding comfort in what people around us are doing without thinking about the long-term consequences.
8. Attachment bias: means that people hold a high position on what they own and do not want to exchange it for something of the same or higher value.
9. Behavioral finance: is the study of the influence of psychology on the behavior of investors or financial analysts.
10. Decision making bias: simply means that you as an investor want to control things and decide everything by yourself.
11. The relative risk: (or risk ratio) is an intuitive way to compare the risks for the two groups.
12. Desire bias: may be a sort of emotional bias that's defined as a person's general tendency to form irrational, potentially uneconomical, choices.
13. Optimism bias: makes you so confident that you reach the point of irrationality and lands into the hole of wrong decisions
14. Risk factor: the market parameters such as interest rates, commodity, foreign currency exchange rates, and stock prices etc., which, through their fluctuation, produce a change in the price of the financial instrument.
15. Overestimating returns: A common blindfolded mistake that happens when you’re confident in investing is when you start overcompensating the profit margins because of the past flourishing trades.
16. Information processing bias: means the inability to understand the information in its correct sense and conceiving it irrationally and abruptly.
17. Heuristics: is a method of solving problems by using practical ways of dealing with them and also learning from previous past experiences.
18. Mental accounting bias: depends upon the provided money divided for different uses intended for it already. For eg- Money for school fees, money for tuition, etc.
19. Framing bias: depends upon the interest of the investor purchasing the object is proportional to the way he is approached.
20. Availability bias- This means that people tend to favor their decisions that are easily accessible or approachable.
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