Cognitive Bias Codex

As human beings, we like to think of ourselves as rational and logical creatures. We believe we make decisions based on facts and evidence, carefully weighing all the pros and cons before coming to a conclusion. However, the truth is our brains are wired to make quick and often biased decisions. These biases, known as cognitive biases, can have a significant impact on our daily lives, especially when it comes to making important decisions such as investing.

The website Visual Capitalist has compiled a comprehensive list of cognitive biases . As I was scrolling through the list, I couldn't help but be amazed at the sheer number of biases we, as humans, are susceptible to. From confirmation bias to hindsight bias, these mental shortcuts can cloud our judgment and lead us to make decisions are not in our best interest.

But why does this matter, you may ask? Well, as an investor, being aware of your cognitive biases can make all the difference between success and failure. Let me explain why.

Firstly, understanding your cognitive biases allows you to recognize them in yourself. By being aware of your own biases, you can take a step back and critically evaluate your thoughts and decisions. This can prevent you from making hasty and irrational investment decisions based on emotions rather than facts.

For example, let's say you have invested a significant amount of money in a company you believe will perform well in the market. However, when the stock price starts to decline, you may experience the sunk cost fallacy, where you refuse to sell the stock because you have already invested so much in it. By recognizing this bias, you can overcome it and make a rational decision based on the current market conditions.

Secondly, being aware of your cognitive biases can help you make more informed and objective decisions. As an investor, it is crucial to gather as much information as possible before making any investment decision. However, our biases can lead us to ignore or dismiss information does not align with our beliefs. By acknowledging and understanding our biases, we can actively seek out diverse perspectives and consider all the available information before making a decision.

Moreover, being aware of your cognitive biases can also help you avoid falling into common traps in the investment world. For instance, the availability heuristic bias can lead us to believe a company is a good investment simply because it is well-known or frequently talked about. This can cause us to overlook other factors such as financial performance and market trends.

Full Cognitive Bias Codex HERE