The Stock market is down from 8Th April and continuing to be down, almost down by over 8% to 9%. There are a lot of behavioral biases present in the market. So let’s discuss these behavioral biases that investors need to avoid in the bear market.
4 Behavioral Biases to Avoid in Bear Market:
i) Hot Hand Fallacy:
- Hot hand fallacy means making a decision based on past performance, for example, there is a cricket match between two teams and if one of the teams is winning the last two matches then people think it will win the next match also.
- The company which performs better for the last 2/3 years and people invest in that just by looking at the past performance are now falling. It is consisting of biases.
- The solution is Asset allocation and re-balancing, which means suppose if you have taken asset allocation of 50% to equity and now it has increased to 55% and try to maintain it at the level of 50%.
ii) Loss Aversion:
- “The pain of losing is psychologically about twice as the pleasure of gaining”.
- People don’t want to book the loss even though the company is not doing well. But investors should book the loss if they find that there is another better company. An advisor can help with these.
iii) Base-Rate Neglect:
- It is one of the common biases that has been seen in the stock market in recent years. In this bias, investors take a base on particular things to analyze the whole company.
- For example, sometimes in IPO investors only analyze the GMP (Grey Market Premium) take all the decisions to subscribe to it then hold it for a long time, and then the stock starts making losses.
iv) Attribute Substitution:
- Attribute substitution means simplifying things, sometimes an investor makes the analysis so simple it is not that simple. Analyzing in detail is very important to make a proper investment.
What should an investor do?
There is a high probability that investors have these kinds of biases, they should always ask questions to themselves about whether they are making the right decision or not and avoid making this kind of mistake. Invest carefully.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.