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Some heuristic-driven biases and cognitive errors that impair judgment are ;
- Representative Belief
It refers to the tendency to form judgment based on stereotypes . we make judgments based on the past events for example, if a student not perform well in previous year , it would be mandatory that he would not perform good in present or coming years , Representativeness is beneficial to investors but if used overconfidence with it may result bad , some good rule of thumb followed by investors are
Investors may become optimistic while reading good results of a company in past and increase pessimism for a company for its bad results .
Investors may belief that a healthy growth in past may be representative of high growth rate in future and they may not realize that growth may randomize in future .
Investors generally that good companies have good stock , while bad companies have bad stock .
Blue-chips are generally high grade stocks and investors may judge highest returns , but growth always fluctuate and probably insecure .
- Higher Overconfidence
People Tend to be very overconfident while investing , while they have an illusion of control , they behave as they have influence all over the market and over future outcomes in an uncertain environment , they just overestimate their forecasts , overconfidence stems partly from illusion of knowledge and such an illusion may be fostered in active involvement and positive early outcomes , overconfidence is certainly very seductive when someone has special knowledge , he tries to persuade people and thinks that they have an investment edge , most of the investors who are successful do not outperform the market consistently .
- FAMILIARITY
It is human tendency to belief the familiar things and they become comfortable with it . Humans generally find shortcuts in choosing investments , rather studying they choose to speculate . Indeed, familiarity breeds investment . This is the reason that people tend to invest more in employers company , local companies and domestic companies .
- Anchoring Effect
When people form an opinion about a company , they are not able to change their , even if the relevant information is wrong .For Example - If an investor form a belief that Company A has higher earning prospect and suddenly there is a mislead while the earnings of the company was very low , if there is a Anchoring Effect which is also known as conservatism ,investors will persist that the company is not worst , insisting themselves to go opposite to particular company just because a bad news.
Investors would shed their initial conservatism at the time when stock price would reduce and move very little.
- Innumeracy and Money Illusion
John Paulos noted in his book "Innumeracy: Mathematical Illiteracy and it's consequences " that some of the blocks to dealing comfortably with numbers and probability , which are due to psychological responses to uncertainty to coincidence. There are also romantic misconceptions with some people due this prospect. There are some misconceptions with some people such as
- People confuse with figuring out correct probability.
2.People tend to pay more attention to big numbers than small numbers.
3.People confuse with nominal changes and real changes .