Cultural Influences on Financial Decisions
February 12, 2025
We are now aware of the various models that are used for equity valuation like Gordon model, H model, 2 stage model etc. in each of these models, we were assuming that the given inputs are dividend, dividend growth rates and time horizon, The output that we expected from these models was the current stock […]
The economics of sports leagues is quite complicated. This is because of various factors. However, two of the most important factors are: The revenue is generated at the central level i.e., by the franchisor, and at the franchise level as well i.e. local revenue. For instance, broadcasting rights are monetized at the central level. However, […]
Fixed income securities are important to investors’ portfolios since they provide regular income in the form of coupon payments. However, there are many different types of bonds available in the market which offer different types of coupon payments. It is important for investors to realize these different types of coupon payments since they can have […]
In the previous article, we learned about what dollar-cost averaging is. We also learned about some of the benefits that this strategy has to offer. Many successful retail investors have hailed this strategy to be the most important factor that has contributed to their success. However, that does not mean that the dollar cost averaging […]
The British banking regulator FSA has prosecuted Barclays for rigging the interest rates in the market. The regulator termed it as being equivalent to stealing money from people who invest in derivatives and other stock market instruments that are sensitive to LIBOR. Barclays, one of the largest banks in the United Kingdom had to pay […]
We are now aware of the fact that investment markets are not driven by mathematical decisions alone. They are heavily influenced by the emotional quotient of investors. In fact, a large number of successful investors attribute their success to their ability to manage their emotions. This is done by understanding the different types of behavioral biases and being vigilant to avoid them. However, the fact is no matter how vigilant one is, one can never totally eradicate behavioral biases. They can only be managed. This is because each and every investor has a bias blind spot. In this article, we will understand the meaning of the term “bias blind spot” as well as how it impacts decision making.
Bias blind spots are a psychological phenomenon that can be described using the term tunnel vision. In simple words, it means that people have the tendency to overlook a lot of information and focus on certain things.
In psychological terms, this is considered to be a necessity. This is because human beings are constantly bombarded with so much information that if they pay equal attention to all of it, they wouldn’t be able to get anything done. Hence, as a result of evolution, people subconsciously omit certain information from their analysis while they are making decisions. This phenomenon is particularly dangerous when people are investing. This is because people are programmed to think in certain ways. Even if they are made aware of their bias, when the time comes to make a decision, they fail to check whether they are acting in a biased manner.
Bias blind spots have a major impact when it comes to investment decision making. Some of the details have been explained below.
The only way to avoid the blind spot bias is by taking inputs from a different person. Each person has their own set of biases. Hence, when you consult a different person, they may give you a point of view that is completely different from yours. By consulting another person and then by patiently listening to their advice, one can identify some of the implicit assumptions being made during the calculations. These implicit assumptions are the ones that are the root cause behind the blind spot bias. Discussion with other people helps to bring these biases to the fore.
Education also plays an important role in overcoming the blind spot bias. Hence, it would be fair to say that investors who are well-read and who are analyzing their own behavior while investing are less prone to blind spot bias. However, it is important to reiterate the fact that blind spot bias is merely a way to reinforce the thought that behavioral biases can only be minimized. It is impossible to completely eliminate them from one’s thinking.
Hence, the bottom line is that the blind spot bias is not a bias in itself. However, instead, it is a tendency which defines how we look at other people’s bias with clarity while neglecting the very same behavior in ourselves while making investment decisions.
Your email address will not be published. Required fields are marked *