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Bias

Bias refers to a systematic deviation or prejudice in favor of or against one thing, person, or group compared to another, often in a way considered to be unfair. In finance and economics, bias can manifest in various ways, such as investor biases (like overconfidence or loss aversion) that affect decision-making. Biases can lead to systematic errors in judgment or behavior, impacting everything from individual investment choices to broader market trends.

Example

An investor may have a confirmation bias, where they only seek out information that supports their existing beliefs about a stock, ignoring evidence that contradicts those beliefs.

Key points

• Bias is a systematic deviation that leads to unfair or irrational decisions.

• Common in investor behavior, affecting decision-making and market trends.

• Understanding bias is essential for making informed and rational financial decisions.

Quick Answers to Curious Questions

Bias can lead to irrational decision-making, such as favoring information that confirms existing beliefs (confirmation bias) or being overly optimistic about market trends (optimism bias).

Overconfidence bias, where investors overestimate their knowledge or ability to predict market movements, leading to excessive risk-taking.

Recognizing bias helps investors make more rational and objective decisions, reducing the likelihood of costly mistakes.