Physiological Biases That Make Investors Become Irrational
1098 words 5 pagesEvery single investment requires decision making. The result of decision making without certain planning might not end well. One cannot simply make a decision by relying on his/her personal resources as the decision may give an impact to the investments. It is difficult to make decision which is related to the field of investments. Investors have to consider their risks, market condition, rate of return, and others in making their investment portfolio. However, there are many possible physiological biases that make investors become irrational thus making bad decisions for the investment.
Illusion of Money
This bias refers to investors making decisions based upon nominal terms and not real terms. It means that the confusion between the …show more content…
Investors think that an event is representative are more likely to occur (Cherry, 2013).
According to Yudkowsky (2008), availability is a heuristic process in which there is a judgment of the frequency of an occasion based on its availability. Jahanzeb, et.al (2012) found that availability may occur when the evidences are easily overweighed when it comes over into our mind. This bias causes the investors overact toward the market results whether they are positive or negative. Jahanzeb, et.al (2012) also found that the overestimation of the probabilities of an event is driven by the availability bias together with memorable or vivid happenings. Investors make decisions and place excessive weight based on the available information.
Anchoring it is happens when the investor cannot integrate new information. The anchoring is that some investors are subject. It refers to individuals’ tendency to base their estimates and decisions on familiar positions, known as “anchors‟, with an adjustment relative to the starting point or known as reference points. This fixation is called anchoring. According to Benartzi and Thaler (1995) argue that a reference point is the stock price that investors compare to the current stock price because it determines whether the investor feels the pleasure of obtaining a profit of the pain when experiencing loss. One important reference point is the purchase price of the security and the investors