Today we will discuss most important part of Finance, which is related to "Neurofinance", is an emerging field of research which aims at improving the micro foundation of financial decisions, through the exploitation of an interdisciplinary approach that merges economics, neuroscience and psychology. Bias ➡ Cognitive Bias.
COGNITIVE BIAS
· "Home" Bias: The tendency to over-invest in "local" companies.
· "Recency" Bias: The tendency to overweight recent information.
· "Anchoring" Bias: When we are asked to estimate something, we tend to be influenced by other (unrelated) numbers we recently encountered.
· "Confirmation" Bias: We tend to look for information that confirms our beliefs and ignore information that contradicts them.
· "Overconfidence" Bias: (here) We tend to be overly sure about our forecasts and/or we overestimate them.
· "Availability": From a very large set of information, we only and arbitrarily select a subset to make decisions.
· "Status quo": We regret more selling something too early than passing on a successful investment opportunity.
· "Disposition": We tend to sell winning positions too early and hold onto losing position for too long.
· "Hindsight": We tend to fail to recognize that even if an event has turned out as we had predicted, there must have been at least a part of chance involved which could have realistically changed the outcome.
· "Bias blind spot": We might see other people's biases but not our own.
