Cognitive biases are like a fog that keeps us from objectively looking at the facts when making a decision. Bull markets tend to increase the density of the fog of certain biases. These are the main ones.
Month after month for the last year the media has been talking about the stock market hitting new highs. The forex trading industry has been the trendsetter in terms of exponential growth. If you type in “stock index hits record” on Google you get 451,000 results. By contrast, if you search for “bear market coming” there are 3,930 results. Although there isn’t the irrational exuberance of 15 years ago, it is much easier to find positive articles on why you should keep investing than ones that say you shouldn’t. Availability bias creates an illusion because when we ask our brain to bring forth all of the data on a topic, it instead brings the data easiest to recall. This recollection is based not on how good t he data is, but on how many times we’ve heard it. A way to lessen this bias is to intentionally search for broader news. If you take a broader look and make a point of looking at articles supporting bear markets as well as bull, you may still decide that this current bull market will continue, but at least you’ll base that decision on more information than just the most readily available.
When I was a rookie stockbroker an old pro told me, “Son, never confuse brains with a bull market.” When a bull market is charging and everything is going up, the bias of overconfidence is created by the illusion of superiority and the illusion of control. Every additional day you stay invested, the bull market adds to this overconfidence because it helps you believe that the reason you’re making money is that your market instincts are better than average. Even if you’re not in control, it might be a good idea to read all the ASX news and keep yourself updated about the current trends in the market. This means you also believe you will know when to exit the market just before the crash. Sadly, the only way to truly deal with this bias is to have the next bear market show you that you are not superior and you are definitely not in control.
Professional investors cut their losers quickly and keep their increasing stocks using etoro trading as well as other resources. Amateurs keep their losers because they “can’t afford the loss” and sell their winners because “you can never go broke taking a profit.” This is due to the disposition effect and regret aversion. We feel that if we don’t sell a losing investment that it isn’t truly a loss and thus we don’t have to accept that we made a bad buying decision (even though the loss is still there). Selling a winner releases positive emotions because it shows we chose correctly-but it may have been too early to sell. The way to dispel the fog is to critically determine whether you would buy the stock at today’s price, whether that is from a broker or a trading website like bei aktienkauf.at. If the answer is you would not buy the stock, then sell the stock.
The final bias also causes the most damage because it affects professional money managers more than amateurs. This is the tendency to take what happened yesterday and today and believe it will continue tomorrow. It’s called projection bias and it’s the reason people consistently buy high and sell low. The way to clear this bias is to broaden your yesterdays. As an example, instead of looking at how the stock market has done this year, see how it has performed since 2007 or 1999. A bit of historical perspective often dispels the fog.
