Rational investing: how to tame emotions and get rid of prejudices?

While we all like to believe that we are rational investors, the reality is often more complex. Our brains are full of cognitive biases - subconscious thought patterns that distort our perceptions and decision-making. These biases are vestiges of evolution that helped our ancestors survive, but in today's financial world they can lead to bad investment decisions.

Let's take a closer look at some common cognitive biases that can sabotage your investment portfolio:

1. Confirmation Bias:

This bias leads us to seek and prefer information that confirms our existing beliefs. For example, if we believe that the price of a certain stock will go up, we tend to ignore negative information and focus only on positive news. This can lead to a situation where we make investment decisions on the basis of limited information and ignore potential risks.

2. Herd Mentality:

Humans are social creatures and we like to belong to a group. The herding instinct makes us follow the behaviour of others, even if it is not rational. For example, if we see that everyone is buying a certain stock, we feel pressured to do the same for fear of missing out. This can lead to a 'bubble' in the market, where the share price rises artificially high until the bubble eventually bursts.

3. Loss Aversion:

Fear of losing is a psychological phenomenon where the pain of losing is greater than the joy of winning. It makes us avoid risk and hold on to investments that are already losing money, even if it is rational to sell them. Fear of loss can prevent us from making profitable investments and lead to portfolio stagnation.

4. Anchoring (Anchoring):

Anchoring is a bias where our judgements and decisions are too heavily influenced by the first piece of information we receive. For example, when we see a stock price for the first time, that price "anchors" in our memory and influences our future decisions about that stock, even if the information is no longer relevant.

5. Overconfidence:

Overconfidence makes us believe that we are better investors than we really are. This can lead to excessive risk-taking and inadequate portfolio diversification.

6. Availability Heuristic:

This bias makes us judge the likelihood of an event by how easily we remember it. For example, if we have recently read news about a market downturn, we tend to judge the probability of a market downturn as higher, even if it is not objectively justified.

7. Representativeness Heuristic:

This bias leads us to draw conclusions based on similarities. For example, if a stock has risen rapidly in the past, we expect it to continue to rise in the future, even if there are no rational reasons for it to do so.

These are just a few examples of the cognitive biases that can influence our investment decisions. In the next section, we will discuss how to overcome these biases and make more rational choices.

Now that we are aware of the existence of cognitive biases and their potential impact on our investment decisions, it is time to learn how to overcome these biases and make more rational choices. It's not always easy because these biases are deeply ingrained in our thinking, but conscious effort and the right strategies can help us improve our financial behaviour.

Here are some practical tips:

1. Draw up a long-term investment plan:

One of the best ways to control emotions and avoid biases is to make a long-term investment plan and stick to it. This will help you focus on your financial goals and avoid impulsive decisions during short-term market fluctuations.

2. Control your emotions:

Before you make an investment decision, pause and ask yourself whether your decision is rational or driven by fear or greed. If you are feeling emotionally unstable, it is better to postpone the decision.

3. Use objective data and analysis:

Don't make investment decisions based on intuition or hearsay alone. Carefully study the company's financials, read analyst reports and consider different investment options.

4. Diversified your portfolio:

Don't put all your eggs in one basket. Split your investments between different assets to reduce risk and protect yourself from market fluctuations.

5. Seek advice from an experienced investor or mentor:

If you are new to investing, it is a good idea to seek advice from an experienced investor or mentor. They can share their experience and knowledge and help you avoid common mistakes.

6. Practice rational thinking:

Rational thinking is a skill that can be developed. Read books on investing and behavioural finance, attend seminars and discuss your investment decisions with other investors.

7. Use technology to help:

Today, there are a number of applications and web platformsto help you monitor and analyse your investments. These tools can help you make more rational decisions and avoid emotional pitfalls.

8. Remember that you are not alone:

Every investor makes mistakes and occasionally falls victim to emotional biases. It's important to learn from your mistakes and constantly improve your investment strategy.

Finally, it is worth remembering that rational investing is a marathon, not a sprint. It requires patience, discipline and constant learning. But if you're willing to make the effort, you can tame your emotions, get rid of your prejudices and achieve your financial goals.