Cultural Influences on Financial Decisions
February 12, 2025
Sporting franchise clubs are business entities at the end of the day. Even though some of them may not be running their operations to maximize their profit, they are still considered to be “for-profit” entities. Hence, ideally, their accounting is supposed to be similar to other business entities. However, this is not the case. There […]
The dividend discount models assume that the investors have no control over the payout policy of the firm whatsoever. This is true for the case of the minority shareholder. Hence, it is said that as far as the minority shareholder is concerned, dividend discount models may be the best tools for valuing a firm. This […]
We now have a fair understanding of what the concepts of free cash flow to the firm is. We also know how to calculate this metric under various circumstances. It is now time to use this metric to arrive at the final valuation for a given firm which is the objective of the whole exercise. […]
Bank failures are complex events that are the result of many underlying factors. When the history of any bank failure is traced, one can see that the trouble is usually present for a long period of time before the culmination takes place and the failure of the bank’s system becomes public knowledge. Hence, one can […]
In the previous article, we have already learned about the repo market. We learned about how the repo market is one of the most important segments of the money market. We also learned about the large volumes of transactions that take place in the repo market. We already know that about $2 trillion to $4 […]
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 *