What is bias? Actually, bias means how a person who is investing in share market or any other market thinks, how he takes decisions or due to what reason he is not able to take right decisions. So, whether it is thinking or reason, you can call it bias.
Mostly there are 7 biases. Let us understand each bias one by one.
1. Loss aversion bias - In loss aversion bias, investor gives more importance to save from loss then earn profit. The investor holds the stock in which there is loss for a longer time in the hope that this stock will increase someday and my loss will be recovered. And at least my capital should be recovered. Even if I do not want profit from this stock, but my capital should be recovered. And the investor sells the stock in which he is making profit as soon as possible so that whatever profit he is making, he gets back the same amount, otherwise if this stock goes down then he will incur loss. Ultimately, he is avoiding loss in both the situations. But in a good stock which is giving him profit, he is not holding long but in the stock which is not good in fundamental or technical he is holding long in the hope of recovering the loss and get the capital invested by the investor.
2. Stereo Type Bias – In this bias, It is a mental tendency in which we form an opinion about a company or group based on a preconceived notion (fixed image), without knowing about the company properly. the investor develops the notion that if it is a big company or has high profile management, then it must be good and will definitely make profits.
But if it is a small company, its market capital is low, the name of the company is less famous compared to a big company, then this company will not be good and will not make profits.
But in reality, while investing, it is important to look at the fundamentals and technical aspects of the company, how the business has been doing till now, what are its strengths and weaknesses, and all other fundamental aspects should be looked at. Technical analysis tells at what price to enter, for how long should one hold, what target price should be kept.
For example - Yes bank, Reliance communication, reliance capital, reliance power and many more are the company which had market capital and high-profile management but not performing good.
3. Endowment Bias - It's a mental bent in which we attach more value to our Asset than to others' Assets, simply because they're ours.
Example – Assume you have invested in a stock and you have invested in that stock from a long period of time and now it is giving you huge profit. The stock is already achieved the target price you have set. Still, you are holding that stock because you got attached with the stock and profit.
Or once you make profit from a stock and you sold it but you want invest in that stock again and again. Or may be if you have working in a company and it is listed in stock market then you want to be invested in that company.
4. Status Quo bias – in this bias investor don’t take any decision in hurry and if we take any decision, it might prove wrong.
For example - if we see that a stock is rising, then we keep watching it rising because we think that such a hasty decision may be wrong and it is not right to take risk in a hurry. Then we take a late decision and invest when the stock has completed its rally.
5. Framing Bias – in this bias, as a Human we don’t accept our mistake, and we Give Answer as per the current situation. Let’s take an example – if we invest in a stock with or without any analysis or information. And in future the situation change and our analysis go wrong then we will not tell our analysis went wrong but we will give a new answer where we show ourself as correct. However, we made a mistake or wrong analysis. We frame a new answer to show ourself correct.
6. Anchoring bias – We work on the basis on that information which we already know, we do not try to gather new information on that particular subject matter.
Example – if we heard any news or read about any stock form newspaper, TV channel, messages or from any friend. then we don’t do any further research or analysis and we got anchored by the information and invest in the stock on the basis of information received without knowing that information is correct or not.
7. Mental accounting Bias – is we treat two sums of money differently accordingly to their origin, like windfall income and our own business income.
Example - Let's say, you invested ₹500,000. After some time, the portfolio value increased to ₹600,000. That means a ₹100,000 profit. Now you think ₹5 lakh is my real money, ₹1 lakh is my profit—let's try risky trading with it. You are considering profit as “extra money”, whereas that is also your money.
One more example - You have two stocks. Stock A is in ₹40,000 profit and Stock B is in ₹40,000 loss. You think Stock A is good let's hold it rather sell it and book the profit. Stock B is making a loss, let's not sell it now.
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