Behavioral Finance: You’re Retarded Explained

via WSB:

As I am watching my portfolio sink into the literal pits of hell, I figured I will make a post that might help some of the investors retards on this sub better understand why they do what they do so that they can recognize and then overcome some of the blind spots in their decision making.

I will start off with a brief intro into BF, then I will list off some emotional and cognitive biases that retail investors are notorious for exhibiting. Hopefully, by the end of this post, you will become more self-aware of what you are doing and become that much closer to someone that doesn’t lose his rent money on a regular basis.

What is Behavioral Finance (BF)

To put it in simplest terms, BF attempts to understand and explain observed investor and market behaviors.

You are all familiar with traditional, neo-classical finance where it assumes investors are risk-averse (lol), maximize utility (level of satisfaction received from the consumption of goods and services), and the markets are efficient in every single way. BF essentially says that’s all bullshit because in reality, people are seldom rational and cannot possibly consider all available information when making a decision, therefore, the markets are not efficient at all.

To put it in layman’s terms, just like two wrongs don’t make a right, BF states that stuffing a million retards on Robinhood doesn’t make an Einstein.

Emotional Bias

1. Loss Aversion Bias: People tend to strongly prefer avoiding losses as opposed to gains. This will cause people to hold on to failing securities. This is a big one on this sub. Don’t get me wrong, I’m all for strong hands and all but recognize when you’re in a bad play and don’t be afraid to get out.
2. Overconfidence Bias: Unwarranted faith in their own intuitive reasoning, judgement, and cognitive ability. This is a big one and is shown every time someone yolo their life savings on far OTM options.
3. Self-Control Bias: Failure to act in pursuit of their long-term goals due to a lack of self-discipline. This is anyone in GME gang that paper handed and sold at open without realizing that the long term play is to bank on this company turning around starting in 20Q4 and triggering a short squeeze.
4. Status Quo Bias: Doing nothing instead of making a change. Example are those that never closed their TSLA puts.
5. Regret-Aversion Bias: Avoid making decisions that will result in action out of fear that decision will turn out poorly. Stop being a pussy.

Cognitive Errors

1. Cognitive Dissonance: mental discomfort that occurs when new information conflicts with previously held beliefs. This is shown when people only notice information that confirm existing biases and ignore conflicting points of view.
2. Conservation Bias: People maintain prior views by inadequately incorporating new information. Will often result in being too slow to update their viewpoints and end up bag holding major losses. A good example are those that diamond handed SPY puts in March.
3. Confirmation Bias: people only look for and notice what confirms their own beliefs and ignore those that contradict. An example can be virtually any “gang” that existed in WSB history. Tanker gang, silver gang, etc.
4. Representativeness Bias: people classify new information based on past experience and not realize that just because something happened in the past does not mean it is repeating itself right now. An example can be anytime someone compares the March crash to 08 or 1929.
5. Anchoring Bias: Use of a psychological heuristic that influences the way people estimate probabilities. This is every time someone says stocks are at an ATH, why should I buy? Without looking at the fundamentals that drove the stock there to begin with
6. Mental Accounting Bias: Treating one sum of money differently to another equal sum. Money is money, get over it.
7. Framing Bias: answering a question differently based on way it is asked.
8. Availability Bias: people take a heuristic approach to estimating the probability of an outcome based on how easily outcome comes to mind. Everytime stocks dip 5-7% I guarantee you there will be posts saying the crash is here simply because people can easily remember March.

Conclusion

In conclusion, before making a decision, ask yourself if any of these biases apply to you. If so, you are probably not thinking straight and acting like a total retard. All of these biases can be countered by having a clear head, understand your risk tolerance and return objectives, and having a clear long term strategy.