Biases can cloud decisions

NEW YORK – Investors are prone to certain emotional – and often irrational – biases that affect their ability to make sound financial decisions.

In fact, there’s an increasingly popular academic establishment that is focused on exactly that: the field of behavioral finance.

One of the larger problems investors face is overconfidence. Men tend to be more overconfident than women, and men tend to trade more actively than women, which hurts their overall returns because the fees involved.

Investors also tend to feel more secure in their choices when following the herd, or doing what everyone else is doing.

Here are a smattering of other biases and behavioral patterns:

Recency bias: People tend to focus too much on what has happened recently.

That’s also why investors will continue to buy winning asset classes – remember the tech boom? – but not sell off part of their winnings.

Loss aversion: Investors are reluctant to realize losses, and conversely, investors are inclined to sell (sometimes too early) because they want that positive reinforcement that comes from securing a gain. People have a tendency to hold on to their losers and sell their winners.