For young investors who are turning into their 30s, the market crash of 2022 will most likely be the biggest market meltdown they have experienced. It certainly has been for me. But listening to the wisdom of the intelligent individuals before me, it is absolutely important to learn from bad experiences rather than regret and feel sorry for yourself.
The illusion of control bias has played a major part in my investment process. It is a cognitive dissonance that happens due to inflated confidence and confirmation bias. This bias makes one believe that they are in control of the outcome of random events while in reality, the mind was only selecting the success as one’s own control and failure as just random market noise. To overcome this illusion, it is important for any investor to utter the following mantra on daily basis:
Investing is a probabilistic activity that only yields success from careful analysis and a disciplined approach.
The overconfidence bias is a form of emotional bias. People with this bias demonstrate overexaggerated faith in their own intuitive reasoning and judgments. I am certainly guilty of allowing myself to be lost in this. Unlike cognitive bias, emotional biases are hard to correct but are possible. This was shown in my poorly diversified portfolios which suffered more than average during down markets. To correct this bias, it is important to review one’s past investment selections and evaluate them objectively.
Self-Control bias is the main weakness that I personally will need to work on first. This bias represents people’s failure to act in the best interest of long-term success and give in to short-term satisfaction. This is due to not having a written plan and an investment strategy. Having a written plan of attack before investing, allows investors to stick to the long-term game plan and not deviate from it.
There are certainly many more weakness that needs to be polished in my investment strategy but the ones mentioned above are prominent ones that I am sure many investors out there share.
