A common behavioural bias is narrative fallacy bias. Because of this, investors gravitate towards investment opportunities even if they are overvalued, said Niraj Shah, Markets Editor, Bloomberg Quint at the Cafemutual Confluence 2020 Investment Marathon.
He said that many investors often repeat such behavioural mistakes when taking investment decisions.
While there are many behavioural biases, Shah highlighted a few of them which are not so well known. Let’s look at these biases:
Bias #1
Performers perform for a reason, so best to buy what is winning
Remember what has done well may not necessarily do well in future.
Many investors invest in top performing funds based on their past performance. However, MF industry’s performance data suggests that the list of top performing funds changes often. Only 13% of the top performing funds make it to the list of top performing funds in the very next year.
One of the easiest ways to select funds is to reach out an expert like MFD.
Bias #2
Compulsive anti-herd bias
Most of you must have heard these lines in your circle, “When everybody thinks alike, there isn’t much thinking taking place” or “If you don’t come across any problems, you are on the wrong path” or “Herd mentality hurts eventually." But this is not true all the time.
Compulsive anti-herd bias prompts investors to not invest in good opportunities just because most investors are opting for it. As a result, investors miss the best bull rallies in the market.
For instance, in 2003, many investors moved out of housing stocks due to rupee depreciation and problem in the sector. However, housing stocks were multi-baggers in 2007.
Fundamental research works well to overcome this bias.
Bias #3
Narrative fallacy bias
Narrative bias means when investors fall prey to a good story even when the price of the security is overvalued. It basically refers to people's tendency to interpret information as being part of a larger story, regardless of whether the facts actually support the full narrative.
Presently, many investors are investing in pharma sector funds because of its promising healthcare story. However, people are investing without doing research.
It is more reliable to do research even though you hear good stories of sector specific funds on news channels or social media platforms. Don’t invest in a fund just because the story looks promising and attractive.
Bias #4
Excessive reliance on past history
For people who compared the current crisis with the 2008 crisis, the markets are up 50% in over 90 trading sessions (As on August 13, 2020). In 2008, the recovery did not happen at a similar pace and similar trading sessions. Hence, it is a bad decision to compare the previous crisis with short term hiccups in the market. Like Mark Twain once said, History doesn’t repeat itself but it often rhymes.
He advised investors to note down issues that have happened with them in the past. It could be anything – e.g. investing in thematic funds too early or investing in a fund without doing any research. Note the reason behind the mistake and refer to it every time while making investment decision.
