Human misjudgment - How we get things WRONG!
We have discussed rationality and thought a lot, and, in the end, we concluded that humans tend to be pretty irrational.
But how exactly do we get things wrong?
Positive thinking bias
Most people tend to be optimists and will classify themselves as "slightly above average" in general, despite knowing that, by definition, only about 50% of people will actually be above average!
This can steer us towards overconfidence and too much trust in what we do. Which in turn leads to an increased chance of small mistakes and distractions making their way into our work and projects.
Cognitive Dissonance is one of the most well-known irrational patterns in human thinking.
It describes our tendency to NOT change our opinion, even if we know we're wrong. This is especially bad in:
Some investors don't sell positions that are losing them money right now because they were very profitable in the past!
Other times, investors might even subconsciously suppress their memories of previous losses, making them feel better about themselves.
Finally, Anchoring is the idea that unrelated facts can influence each other.
Again, we'll focus on the impacts this might have on an investor, who is trying to be rational and bias-free!
Most people predict that the price of a Stock tomorrow will very close to today's price because they're Anchored to this information.
Often, if a product or service changes name, the consumer's or investor's perspective on it can change a lot.
For example, during the Internet bubble, before 2000, simply adding '.com' to the end of a company's name would translate into a pretty big increase in its share price!
There are lots of ways that we can make simple mistakes, often unconsciously!
Learning about our biases can make us better at decision-making, which helps in everything in our lives, from investing to being more social!
Thanks for reading!
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Take a look at my last post, about Investments and Psychology:
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