For the average investor, the headlines don’t look good right now.
Stock marketsare in turmoil, and the threat ofa recession looms.
And during this sort of economic volatility, our natural instincts can lead us astray.
When making investment decisions, its important to have an objective, balanced perspective.
Information bias comes up whenever our thinking becomes skewed due to how we filter and interpret data.
This tendency is known as confirmation bias, and it can spell disaster for investors.
This confirmation bias causes you to overweight data that supports your thesis and disregard contradicting evidence.
This can lead to impulsive and risky investments as a result of short-term market fluctuations.
This leads to investors holding onto unprofitable investments, rather than cutting their losses and moving on.
All the obvious biases seep into your investments, too.
So we understand that, as a human, your decision-making cant be perfect.
Lets take a look at how investors make more rational and informed choices.
Tips to avoid information bias
Panic is the enemy of sound decision-making.
The restaurants soon filled up again, and the share price has more than bounced back.
Here are some tips to avoid panic and avoid information bias when investing:
Diversify your sources.
Dont just rely on one news outlet, analyst, or data source when researching investment opportunities.
Get perspectives from multiple credible sources to balance out any potential biases.
Check facts and question assumptions.
Dont take statements at face value.
Dig deeper to verify claims and test underlying assumptions.
Dont just seek out information that confirms your existing views.
Make an effort to read sources that challenge your thinking.
Be aware of how you process information.
All individuals have biases in how they interpret data.
Reflect on your own inherent biases and investing style.
Look at opposing viewpoints.
For every investment thesis, there is often a counter-argument.
Seek to understand different perspectives.
Use unbiased quantitative data.
Look at objective measurements like financial ratios, growth metrics, and market share when evaluating stocks.
Set a research cutoff date.
Review your investment rationale periodically to verify if your original assumptions still hold true.
Hire a financial advisor.
An experienced professional can help point out blind spots in your thinking and research process.
Dont let biased thinking derail your investing success.
