{"concept":{"id":31,"slug":"cognitive-bias","term":"Cognitive bias","shortDefinition":"A systematic pattern of thinking that deviates from objective or rational judgment -- it also affects experienced investors, not only beginners.","longDefinition":"A cognitive bias is a systematic pattern of thinking that deviates from objective or rational judgment. It isn't a one-off mistake or a matter of intelligence -- it's a predictable tendency that affects most people, including experienced and professional investors. Recognizing your own biases doesn't eliminate them automatically, but it's the necessary first step toward counteracting them with a more structured decision-making process."},"relations":{"requirement":[],"contrast":[],"related":[{"concept":{"id":32,"slug":"loss-aversion","term":"Loss aversion","shortDefinition":"The tendency to feel the pain of losing a given amount of money far more intensely than the pleasure of gaining that same amount.","longDefinition":"Loss aversion is the tendency to feel the pain of losing a given amount of money far more intensely than the pleasure of gaining that same amount. In practice, this leads to decisions that prioritize avoiding a loss -- even a small or already unavoidable one -- over objectively reasonable decisions, such as holding a losing investment longer than the situation justifies, just to avoid \"locking in\" that loss by selling. It shouldn't be confused with prudence: prudence is a rational decision based on actual risk, while loss aversion is a disproportionate emotional reaction."}},{"concept":{"id":33,"slug":"confirmation-bias","term":"Confirmation bias","shortDefinition":"The tendency to seek out, interpret, and remember information that confirms what you already believe, while ignoring information that contradicts it.","longDefinition":"Confirmation bias is the tendency to seek out, interpret, and remember information that confirms what you already believe, while ignoring or downplaying information that contradicts it. An investor who has already decided an asset is a good investment tends to focus only on news that reinforces that idea, without giving equal weight to news that calls it into question."}},{"concept":{"id":34,"slug":"investor-return-gap","term":"Investor return gap","shortDefinition":"The difference between the return a market offers over a period and the return the average investor in that market actually achieves.","longDefinition":"The investor return gap is the difference between the return a market -- or a fund/ETF that tracks it -- offers over a period, and the return the average investor in that same market actually achieves. It isn't caused by the market performing differently for each investor, but by the investor's own buying and selling behavior: buying once prices have already risen a lot and selling once they've already fallen a lot, driven by the emotion of the moment rather than a prior plan. Cognitive biases -- in particular loss aversion and confirmation bias -- are, to a large extent, the cause of this behavior."}}],"calculatedBy":[]},"curricularPosition":[{"id":26,"moduleId":9,"slug":"most-common-cognitive-biases-when-investing","title":"What are the most common cognitive biases when investing?","summary":"You recognize what a cognitive bias is and the two most relevant examples when investing: loss aversion and confirmation bias.","bodyMarkdown":"## Objectives\n\nBy the end of this lesson you recognize what a cognitive bias is and the two most relevant examples when investing: loss aversion and confirmation bias.\n\n## Content\n\nA cognitive bias is a systematic pattern of thinking that deviates from objective or rational judgment. It isn't a one-off mistake or a matter of intelligence -- it's a predictable tendency that affects most people, including experienced and professional investors.\n\n**Loss aversion** is the tendency to feel the pain of losing a given amount of money far more intensely than the pleasure of gaining that same amount. In practice, this leads to decisions that prioritize avoiding a loss -- even a small or already unavoidable one -- over objectively reasonable decisions, such as holding a losing investment longer than the situation justifies, just to avoid \"locking in\" that loss by selling.\n\n**Confirmation bias** is the tendency to seek out, interpret, and remember information that confirms what you already believe, while ignoring or downplaying information that contradicts it. An investor who has already decided an asset is a good investment tends to focus only on news that reinforces that idea, without giving equal weight to news that calls it into question.\n\nThese aren't the only biases that affect an investor -- overconfidence, for example, is another common pattern -- but loss aversion and confirmation bias are among the most studied and with the most documented practical impact. Recognizing them doesn't eliminate them automatically, but it's the necessary first step toward counteracting them with a more structured decision-making process, the topic of this module's last lesson.\n\n## Example\n\nHolding a losing stock for far longer than you would hold an equivalent gain, just because selling would \"lock in\" the loss, is a direct example of loss aversion acting on an investment decision.\n\n## Common mistakes\n\n- Thinking cognitive biases only affect beginner or inexperienced investors -- they're systematic patterns that also affect experienced investors, including professionals.\n- Confusing loss aversion with simple prudence -- prudence is a rational decision based on actual risk; loss aversion is a disproportionate emotional reaction, even when holding the position no longer has a rational justification.\n\n## Summary\n\nA cognitive bias is a systematic pattern of thinking that departs from objective judgment. Loss aversion and confirmation bias are two of the most common and most impactful when investing.\n\n## Self-check\n\nWhy can holding a losing investment \"to avoid locking it in\" be an example of loss aversion, not prudence?\n\nHow does confirmation bias show up in how someone looks for information about an investment they've already made?","bodyHtml":"<h2>Objectives</h2>\n<p>By the end of this lesson you recognize what a cognitive bias is and the two most relevant examples when investing: loss aversion and confirmation bias.</p>\n<h2>Content</h2>\n<p>A cognitive bias is a systematic pattern of thinking that deviates from objective or rational judgment. It isn't a one-off mistake or a matter of intelligence -- it's a predictable tendency that affects most people, including experienced and professional investors.</p>\n<p><strong>Loss aversion</strong> is the tendency to feel the pain of losing a given amount of money far more intensely than the pleasure of gaining that same amount. In practice, this leads to decisions that prioritize avoiding a loss -- even a small or already unavoidable one -- over objectively reasonable decisions, such as holding a losing investment longer than the situation justifies, just to avoid &quot;locking in&quot; that loss by selling.</p>\n<p><strong>Confirmation bias</strong> is the tendency to seek out, interpret, and remember information that confirms what you already believe, while ignoring or downplaying information that contradicts it. An investor who has already decided an asset is a good investment tends to focus only on news that reinforces that idea, without giving equal weight to news that calls it into question.</p>\n<p>These aren't the only biases that affect an investor -- overconfidence, for example, is another common pattern -- but loss aversion and confirmation bias are among the most studied and with the most documented practical impact. Recognizing them doesn't eliminate them automatically, but it's the necessary first step toward counteracting them with a more structured decision-making process, the topic of this module's last lesson.</p>\n<h2>Example</h2>\n<p>Holding a losing stock for far longer than you would hold an equivalent gain, just because selling would &quot;lock in&quot; the loss, is a direct example of loss aversion acting on an investment decision.</p>\n<h2>Common mistakes</h2>\n<ul><li>Thinking cognitive biases only affect beginner or inexperienced investors -- they're systematic patterns that also affect experienced investors, including professionals.</li><li>Confusing loss aversion with simple prudence -- prudence is a rational decision based on actual risk; loss aversion is a disproportionate emotional reaction, even when holding the position no longer has a rational justification.</li></ul>\n<h2>Summary</h2>\n<p>A cognitive bias is a systematic pattern of thinking that departs from objective judgment. Loss aversion and confirmation bias are two of the most common and most impactful when investing.</p>\n<h2>Self-check</h2>\n<p>Why can holding a losing investment &quot;to avoid locking it in&quot; be an example of loss aversion, not prudence?</p>\n<p>How does confirmation bias show up in how someone looks for information about an investment they've already made?</p>","sortOrder":1,"readingMinutes":6,"difficulty":"Básico","url":"/en/academy/fundamentals/investor-psychology/most-common-cognitive-biases-when-investing"}],"graphSummary":{"root":{"type":"concept","id":"31","depthFromRoot":0,"entity":{"type":"concept","slug":"sesgo-cognitivo","term":"Sesgo cognitivo","excerpt":"Patrón sistemático de pensamiento que se desvía de un juicio objetivo o racional -- afecta también a inversores experimentados, no solo a principiantes."}},"depth":1,"returnedNodes":1,"truncated":false,"hasCycle":false,"nodes":[{"type":"concept","id":"31","depthFromRoot":0,"entity":{"type":"concept","slug":"sesgo-cognitivo","term":"Sesgo cognitivo","excerpt":"Patrón sistemático de pensamiento que se desvía de un juicio objetivo o racional -- afecta también a inversores experimentados, no solo a principiantes."}}],"edges":[]},"relatedNews":[],"relatedEntities":[]}