Traditional economic and finance literature assumes that investors approach risk and return rationally. However, in real life, the emotions drive investors to make many fundamental missteps during investment.
After study Behavioral Finance this year, I understand how people actually make decisions and ways in which they tend to deviate from full rationality. Understanding of these biases can help me to avoid some common pitfalls and position my portfolios to best fit my personality. In long term, I believe it will enhance the performance and reduce the risk of my investment.
Behavior Biases affect my Investment Decision
Before planning for the long-term investment strategy, I should review which behavior bias affecting my investment decisions in the past so that I can avoid them in future.
In below sections, I will explain what mistakes I have committed and how behavior biases affected me.
Home Bias and Ambiguity Aversion 1. There are so many stocks in the market. Just like other investors, when I choose the stock from the pool, I always go with the stock name that I am familiar with. For example, when I wanted to buy the shares which is a tele-communication company, the first stock name which appeared in my mind is China Mobile Limited (941). It was because I was currently using the service provided by it. I did not consider other companies in the same industry and compare their financial information thoroughly before I bought China Mobile. 2. For the shares I bought now, all of them are traded in Hong Kong Stock Market. I do not invest in any stocks which traded in foreign stock market, even though it is every convenient to trade foreign stocks through trading in Internet. 3. My company, HSBC, provides share options to us every year. I execute the share options every year. Now the value of the HSBC shares which I hold equals around 20% of my total