Decision Biases
Realized returns result from decisions at critical times in the life of an investment. People are naturally irrational. The following is a list of types of decision making biases for investors to recognize and avoid.
Activity
Desire to make changes when patience has a higher probability of success
Adverse Selection
Considering only that which is available for lack of a virtue
Affect
Being influenced by an immediately preceding feeling about something unrelated
Anchoring
Overlooking the absolute amount and judging relative to a stated reference
Attribution
Crediting skill for success and luck for failure
Availability
Evaluating the probability of something from a few memorable examples
Complexity
Optimizing for unimportant or overlooking important factors
Compromise
Splitting the difference when it isn’t clear which choice is best
Confirmation
Overweighting information that confirms prior beliefs
Correlation
Incorrectly inferring a causal relationship from correlated patterns
Endowment
Valuing something owned more highly than the same thing for purchase
Familiarity
A preference for things that are known or routine
Framing
Reacting differently to the same choice whether its benefits or its costs are stated
Gut feel
Acting passionately without following effortful reason-based analysis
Halo
Overweighting the opinion of somebody with a credential
Hindsight
Judging past events and decisions in view of later-known information
Interdependency
Disregarding networks of effects from causal interdependencies
Limitlessness
Intending non-specific ideal results without accounting for the cost to achieve it in view of necessary trade-offs
Loss Aversion
Holding losers or selling winners early
Mediocrity
Overlooking the possibility and effect of extreme outliers
Narrative
Overestimating the probability of outcomes that fit a story, expectation, or preference
Omission
Accepting greater risk by inaction to avoid the possibility of blame for failure
Opportunity Cost
Deciding without the context of alternatives
Scale
Confusion of linear and exponential functions or using an inaccurate exponent
Sunk Cost
Including past costs in calculations
Survivorship
Studying examples of success while overlooking examples of failure with similar attributes
Temporal
Undue relative consideration of near- and far-term results or effects
Timing
Hesitation under urgency or committing before necessary
Trend
Belief that patterns found in random noise foreshadow future trends other than regression to the mean
Unavailability
Viewing an absence of evidence as evidence of absence