Top 20 Cognitive Biases for Stock Investors (Value Investing FM) – Investment Academy – Learn value investing from scratch

Top 20 cognitive biases when investing in the stock market

In this episode of Value Investing FM we will discuss an essential topic when making investment decisions in the stock market, cognitive biases. We will explain what they are, their importance and we will make a double top 10 of those that most affect us when investing with their corresponding examples.

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  • Warren Buffett 

    Sunk Cost Fallacy

    The sunk cost fallacy, sunk cost fallacy, or concord fallacy, occurs when someone makes an investment that appears to be unprofitable and reasons as follows: «I cannot stop now, otherwise what I have invested so far it will be lost. This is true, of course, but irrelevant to the decision whether one should continue to invest in the project. In other words, the arguments for continuing to invest in the project should not be based on fear of loss of the investment but on the expectations of the project's operation, both of which are totally independent.

    Eg I bought at 80 and now it is at 40. At these prices I cannot sell.

    The argument verbose

    An argumentum verbosium, or argument by verbosity or verbosity, occurs when an argument is so complex, so long, and so poorly presented by the speaker that others are forced to believe it and assume it to be true. This assumption occurs frequently to avoid energy expenditure and in the speaker's time to examine the details. At the same time, due to the intimidation due to complexity that the speaker develops and the risk of ridicule for ignorance. See weakness and strength bias. This fallacy is epitomized by the following phrase: "If you can't convince them with your brilliance, then baffle them with all the details." This type of fallacy is very common in academic circles and in the media.

    Eg some very extensive analyzes, mainly short ones, usually use this resource

    Biased sample

    A biased sample is a sample that has been falsely regarded as typical of a population from which it has been drawn.

    Eg Burford cannot be cheap. Everyone follows her.

    Simple Cause

    The fallacy of the simple cause or conjunctive effect or spurious relationship, occurs when it is assumed that there is only a simple cause for a result when in fact there may be a specific or sufficient set of causes that have caused it.

    Eg The stock has fallen due to not having complied with the guidance.

    After this, therefore because of this y with this, ergo propter hoc

    Post hoc is also called coincident correlation or false causality. It is a kind of fallacy that affirms or assumes that if one event happens after another, the second is a consequence of the first.

    With this, therefore because of this (cn latín, "With this, therefore because of this") is a fallacy (that is, an argument that seems valid, but is not) that is made when infer that two or more Event Venue they are connected causally because they happen together. That is, the fallacy consists in inferring that there is a causal relationship between two or more events due to having observed a correlación statistics between them. This fallacy is often refuted by the phrase "correlation does not imply causation."

    Eg the indicator of the Super Bowl.

    AFC⇒ Bearish. NFC⇒ Bullish. Prediction: 40 out of 50 (80%)

    False dilemma

    A false dilemma, or false dichotomy or false bifurcation, implies a situation in which only two points of view are weighed as the only options, when, in reality, there are one or more options that have not been considered. The two alternatives presented are usually, but not always, the extreme points of the spectrum of ideas.

    Eg Do I invest in stocks or funds? Active or passive investment?

    Recommended links

    • Behavioral Economics with Pedro Bermejo and Pedro Rey Biel