Behavioral Biases

Behavioral Biases

Biases we have
Number 2

Behavioral Biases

Behavioral biases—common tendencies that can be harmful to investment decision making—help explain why investors sometimes make poor choices. Investors who learn to combat behavioral biases may be better equipped to make decisions that can help improve their long-term investment results.

Heuristics Heuristics are mental shortcuts that help us make quick decisions. Sometimes, however, heuristics may lead us astrayLearn More >
Prospect theory Prospect Theory explains why losses hurt twice as bad as comparable gains feel good, which is why we sometimes may overreact to short-term portfolio lossesLearn More >
Framing Framing refers to the concept that the way a particular choice is presented can determine how people react to it. Consider how different people see optical illusionsLearn More >
Attention response Attention response is the tendency to incorrectly estimate the frequency or severity of an event based on recent exposure to it. For example, some people may be afraid to fly after hearing of a recent plane crashLearn More >
Extrapolation Extrapolation is the tendency to estimate the future based on the assumption that trends will continue as they are. Reality is rarely as extreme as we can envision, yet extrapolation can result in some silly investment decisionsLearn More >
Planning fallacy Planning fallacy is the tendency to be overoptimistic in planning. Planning fallacy explains why most people overrate their own abilitiesLearn More >
Risk vs. return Risk vs. return misperception is the tendency to believe that taking more risk results in more return. Remember, if risk were always rewarded with higher returns, then achieving the returns wouldn't be riskyLearn More >

No investment strategy can assure a profit or protect against loss. This material is intended for informational purposes only. The information provided in this material should not be considered a recommendation to purchase or sell any particular security. Strategies discussed herein are subject to change at any time by the investment manager in its discretion due to market conditions or opportunities. Market conditions may impact performance.


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