What Psychological Traps Can Interfere Investors Intentions?

Some weaknesses of the human psyche can affect the ability of financial analysts to be accurate and objective in their predictions. In the book “Managing investment portfolios: a dynamic process” are described the following psychological traps that may lead to confusion and wrong choices:

Psychological Traps Can Interfere Investors Intentions

Anchoring Investors Trap

This is the tendency of the mind to give more weight to the first information it receives on a particular subject. In other words, first impressions, forecasts or data determine the making of judgments and predictions.

For example, imagine that in front of an investment committee are presented several hypotheses about the return on the capital market and the first presentation may become the “anchor” for a discussion and the other presentations just help to expand it. This “anchor” more often than not gets advantage over their choice at the end.
The analyst could avoid this trap by avoiding hasty conclusions.

Status quo Investors Trap

This is the tendency of analysts to stick to their last observation, moreover they do not foresee future changes. If the inflation keeps on growing rapidly for several periods, similar growth can be predicted during the next period.

In the context of investment decisions, the status quo is often the preferred alternative because a new solution is usually associated with additional analysis, and can lead to disappointment if it proves wrong.
This trap can be avoided by rational analysis in the process of making an investment decision.

Confirming Evidence Investors Trap

This trap makes analysts give greater weight to information that supports an existing and preferred point of view instead of the evidences that could challenge this point of view. This tendency leads to the choice to seek information that supports the analyst’s opinion.
The following steps can one being objecive:
- Analyzing all available information with equal effort;
- Providing an independent opinion that challenges the preferences of the analyst;
- An objective attitude towards one’s own motives.

Overconfidence Investors Trap

This is people’s inclination to overestimate the accuracy of their forecasts. Many people do not see the possibility of making wrong forecast or do not even try to evaluate the possibility of one (and prepare for risks). So, we believe that most people share our views. Overconfidence finds expression in determining a quite narrow range of possibilities while making predictions.
To avoid falling into this trap one should expand their expectations about the main forecast.

Prudence Investors Trap

This tendency is projected to soften forecasts that seem to be a bit extreme or to be too cautious in the forecasts. This happens in the investments’ area when people make decisions that would cost a lot and could harm the career of the analyst.
To avoid falling into this trap one should expand their expectations about the main forecast. In addition, the key assumptions in the forecast should be subjected to further analysis.

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Recallability Investors Trap

This is a tendency showing that forecasts can be extremely affected by the events that have made a strong impression and have remained in the minds of the analyst. Often the predictions are strongly influenced by memories of dramatic events in the past.
For example, it has been quoted very often that the collapse of the stock exchange in the USA (1929) had a negative impact on shares for three decades.
To avoid this trap, analysts should base their conclusions on objective data and models instead of personal memories and emotions.

What Psychological Traps Can Interfere Investors Intentions?