Notes

Common Behavioural Biases
Investors exhibit many biases. Few
of these behavioural biases exist in
isolation because deep interactions
exist among different biases. None￾theless, the following list represents
some common biases facing investors
but others may be equally important
depending on the specific situation.
Baker and Nofsinger (2002), Ricciardi
(2008), iShares (2013), Parker (2013),
and Seawright (2012) provide further
discussion of behavioural biases and
how to deal with them.
1. Representativeness. Represen￾tativeness results in investors labeling
an investment as good or bad based on
its recent performance. Consequently,
they buy stocks after prices have risen
expecting those increases to continue
and ignore stocks when their prices are
below their intrinsic values. Investors
should have a clearly defined analyti￾cal process that they test and retest in
order to refine and improve it over the
long run.
2. Regret (loss) aversion. Regret
aversion describes the emotion of re￾gret experienced after making a choice
that turns out to be either a bad or
inferior choice. Investors who are in￾fluenced by anticipated regret are mo￾tivated to take less risk because this
lessens the potential of poor outcomes.
Regret aversion can explain investor
reluctance to sell “losing” investments
because it gives them feedback that
they have made bad decisions. Disci￾plined investing requires overcoming
the reluctance to realise losses.