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Three behavioural biases to watch out for during a crisis
Financial Education

Three behavioural biases to watch out for during a crisis

Nick Kirrage walks us through the most common behavioural biases investors suffer from and how to overcome them.
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18 JUN, 2020

By Jo Marshall


At the best of times, investors are at risk of succumbing to certain behavioural biases that can cloud judgment and impair decision-making.

In highly stressful and unpredictable times like the Covid-19 crisis, there is a greater propensity for this to happen, and it can be highly detrimental to long-term goals.

InvestIQ is Schroders’ proprietary questionnaire platform that helps investors identify their investing personality and highlights the behavioural biases they are most likely to experience when investing. Since its launch in 2017, the test has been completed by more than 53,000 people across 16 countries.

Our latest data shows that the top three biases investors are likely to suffer from are ambiguity aversion, over-optimism and loss aversion. We spoke to Nick Kirrage, Co-Head of the Schroders Value team, for his views on these biases and tips to overcome them.

Ambiguity aversion

This is also referred to as uncertainty aversion, because it’s about preferring the known over the unknown; such investors tend to invest in what they believe to be safer and more predictable investments. The risk is that they opt for investments with lower returns instead of riskier investments which, while they have no certainty of what they will deliver, have potentially higher returns.

Loss aversion

The second most common investor bias, loss aversion, means investors end up trying to avoid losses at all costs rather than logically considering the alternatives. The risk is that they miss out on good gains because the anticipated emotional consequences of loss are too much to bear.

Optimism bias

The third bias, optimism bias, is the tendency to overestimate the likelihood of success compared to the likelihood of failure. This is only a bad thing if it leads to you ignoring key warning signs or miss the potential pitfalls of an investment because you’re being overly optimistic about its prospects. Used in the right way, the tendency to be optimistic can be a good thing.

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