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9 common behavioral finance biases highlighted by Daniel Crosby

Updated: Apr 7, 2022

During the 17th edition (march 2022) of the Trends Investment Summit that took place in Brussels we had the pleasure to listen to Daniel Crosby, Ph.D. psyhologist, expert in behavioralfinance and The New York Times & USA TODAY best selling-author of "The Laws of Wealth".

9 common behavioral finance biases - Daniel Crosby - 4Investors

This lecture was the opportunity for private and professional investors to remember some behavioral bias and to get precious advices . You will find below the 9 common bias I captured from this presentation :

1. Investors usually overweight what they know :

The experts in neuroscience observed that even professional investors overweight products they know. It can be stocks from their own sector or own took the example of Canadian investors that are overweighting Canadian stocks versus a neutral investor that will base his decision on a rational diversification based on the MSCI World Stock Index (Canadian stock weight +/- 3% in February 2022)

Acquiring something that investors don't know is a tough challenge.

2. Tension :

We are used to focus our attention on what's doing (newsworthy) noises (e.g. : security after a terrorist attack). How many of your friends are investing in Bitcoins even if they don't understand how it works, just because there is a word of mouth about those products ?

3. Emotions :

When we face crisis, even professional investors are influenced by irrational motivations.

4. The questioning bias :

It could be dangerous to answer to the wrong question. Actually the behavioral finance experts observed that sometimes we don't recognize the dangerousness of an investment product.

Why ? Just because we consider that this product is fun.

Example :

As private investors (sometimes professionals) we answer to the I like this investment ? Instead of is it interesting to invest in that kind of investment opportunity ?

5. Bilingual :

behavioral finance - 4investors

Experts in behavioral finance observed that people taking decisions in their second language did the best choices vs those taking decisions in their native language.

Why ? Because you think more slowly and less impulsively when it's not your mother tongue.

6. Think that we are smarter than the market :

Don't try to beat the market through stock picking. Different studies have shown that it will be smarter to to invest regularly in the same fund Yes, even better than a composite index.

7. Reduce our level of implication in an investment process :

Our implication in a process gives more confidence but this confidence improves our investment risk to lose money.

8. More analytical variables = worst decisions

Keep it simple : Reducing variables helps us to take better decisions .. even if it gives us less confidence.

9. During the thunderbird, stay home :

Thunderbird - behavioral finance - 4investors

This attitude is linked to our natural tendency to be impatient. The best investors will turn off their head and adopt a buy and hold strategy. Which is once and for all the best decision to take.

From the book : "The Behavioral Investor" - Harriman House - 2018 by Daniel Crosby.

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