What are our behavioral biases when it comes to investing?

Our choice of savings depends on our behavioral prejudices and can motivate us to make decisions that run counter to our investment goals. The AMF (Financial Markets Authority) analyzes the most common investment biases and provides the keys to correcting them.

The choice of savings is influenced by certain reflexes, behavioral prejudices, which can lead to conflicting decisions about their investment goals. Knowing these biases allows you to objectify your reactions and make better investment decisions. The AMF (Financial Markets Authority) analyzes the most common investment biases and provides the keys to correcting them.

Aversion to loss, ambiguity and change

Fear of losing money encourages many savers to make low-risk but low-return investments. This fear is stronger than the desire for a better return, because losses have a greater psychological impact than gains. Thus, some investors invest in low-risk assets when they would be more interested in investing in other products and diversifying their investments to minimize the risk of loss.

Savers do not like to gamble and prefer to know for sure what will be the result of their investment. Thus, choosing a low-paying book whose course is known and guaranteed seems better to them than investing in another potentially more profitable product, but whose return is uncertain. However, over time, diversified investments in the stock market (such as stocks) tend to provide higher returns than guaranteed investments.

It is easier for us to choose the status quo than to change, even if it can lead us to a better situation. Thus, some savers leave their investments as they are, rather than trying to diversify them. However, as the investor’s profile changes, so do the needs. That’s why it’s helpful to analyze your investments at different stages of your life.

Savers often overestimate the risks associated with financial investments because they only consider changes for a short period of time. They do not invest enough in products such as stocks, which sometimes fluctuate widely over a short period of time. However, for some investments, such as equity investments, the retention period reduces the risk. If it is a risky investment for more than 1 year, it is much less for 10 or more years.

The advantage of the present

As they say: “Better one in hand than two in the house.” Many of us prefer the present gain to the potential future, even if it is higher. Thus, some prefer to immediately benefit from their money, rather than invest it in their future needs, such as retirement. However, saving as soon as possible will allow them to have capital or additional income after retirement.

Prejudice confirmation

People often find it easier to take into account information that confirms their ideas than information that calls them into question. Thus, if he thinks that the stock market is too risky an investment, it will be easier for him to take into account information about crises than about long-term results. However, to make an informed choice, it is better to look for information that does not point in one direction, and compare the pros and cons.

Reassessment of rare probabilities

When we subscribe to a financial product, the information documents we receive describe various risks of loss, even if they are sometimes unlikely. This forces us to overestimate the likelihood that a rare event will occur, and encourages us to choose less risky and low-paying products for fear that a catastrophic event will result in a significant loss of investment, while the event has little chance of happening. However, if no investment in financial markets can guarantee the invested capital, diversification provides an opportunity to protect against the very possibility of rare events.