Logical Biases to Be Aware off:

Loss Aversion – The feeling of wanting to avoid a loss and doing all we can to reduce the chance of it happening. The evidence suggests that we feel losses at least two to three times as strong as we feel an equivalent gain.

In other words, the risk of the pain of losing far exceeds the potential payoff. This bias drives us to actions to avoid losses rather than those that will result in gains. We’ll take the road to avoid the cliff rather than take the road that will lead us to the treasure.    

Endowment Effect – Placing more value on something we own than something we don’t own.

This bias means that we often hold on to investments long after they’ve become irrelevant to our goals and long after an alternative investment would better serve our long-term purposes and goals.

Regret Aversion – This is where people think about the worst possible outcome and how they would feel if that outcome was realized. This leads people to choose options that reduce or eliminate the chance of regret, even if the decision is not the right one.

Status Quo Bias – People gripped by this bias don’t like change. They prefer things to stay the same, so they’ll do nothing or stick with a choice that they have already made.

This is why people stick to investment options like stocks and bonds and mutual funds that they’re familiar with or that their advisors recommend rather than switching to something else to change a losing investment strategy. Unfamiliarity makes them nervous.

Disposition Effect – This is where we tend to hold on to losing investments for too long while selling winning investments too quickly. This is closely linked to loss aversion.

Herding Bias – This is a compulsion to follow the crowd – and a natural discomfort when you feel that you are going out on a limb.

Back to the stampeding herd of mammoths example. If you saw your buddies running for their lives, you didn’t ask questions – even if you couldn’t see the mammoth in the distance. All you know was that if you didn’t follow the crowd, you were going to be the one to get trampled.