In last Friday’s Remarks I mentioned three “cognitive biases” that affect all investors in their ability to interpret information. I’d like to explore these a bit further. Let’s begin with a broader definition of what a cognitive bias is.
Cognitive biases stem from the field of Psychology – which aims to scientifically study the thought patterns and behaviors of people. These biases refer to natural human tendencies to think in certain ways; they represent deviations from “normal” or “standard” rationality. We’ll discuss these biases from an investing standpoint, but realize that these biases are omnipresent and influence us in our jobs, relationships, and life in general.
The three biases mentioned last week were anchoring, the availability heuristic, and hyperbolic discounting. These are a subset of the many biases that psychologists have found to impact decision making, and will act as a good start for our exploration. We'll cover two of them today, and ... Log in or subscribe to continue reading.
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