Selecting Stocks: Straying From Quick Thinking
Introduction
Whether someone is working in the finance industry or trying to make passive income, selecting stocks is available for everyone. Selecting stocks has benefits and risks, depending on the dangers of the chosen stocks, someone can produce significant amounts of money or lose a lot of money.
One way why heuristic bias is prevalent on a global scale is by evaluating danger or assessing risks. With exposure to social media, news about extreme hazards, such as shootings or robberies, becomes much more widespread and televised than without social media. As a result, people likely overestimate the likelihood of extreme dangers affecting them, taking unnecessary precautions while underestimating the legitimate risks that may genuinely affect them.
What Is Heuristic Bias?
Heuristic bias convinces people to make decisions based on shortcuts or “rules of thumb” that allow for quick decision-making over thinking logically which can cause systematic errors or biases in judgment.
What Is Stock Selection?
When selecting stocks, one undergoes the process of identifying the risks and rewards and discovering a successful balance to maximize the profits gained while having minimal losses.
Case Study: Heuristic Bias During Stock Selection
Heuristic bias can influence investors when it comes time to select stocks. People who aren’t as familiar with investing are much more likely to pick known stocks than those that can provide the greatest benefits. They are more likely to pick the stocks with a strong reputation and have greater media attention. Also, heuristic bias can cause people to create stereotypes in the market based on past information which can play out incorrectly and lead to failed investments. Finally, heuristic bias can cause speculation in investing in foreign markets, using a familiar currency as a reference point which can potentially misjudge a foreign stock’s valuation.
Heuristic Bias is also prevalent in New York. Investors in New York may be more prone to selecting stocks they see commonly advertised, especially those advertised in obvious areas such as Times Square. This leads to judgment based on basic appeal over actual research. Also, New Yorkers may be more prone to investing in companies that have their headquarters based in New York, with big names such as JP Morgan, Chase, Goldman Sachs, etc. Furthermore, New Yorkers may feel that companies resembling previous successful NYSE-listed companies are worth investing in, such as tech companies that remind them of IBM.
Stratagies To Overcome Heuristic Bias
How To Avoid Heuristic Bias In Everyday Life:
- Take time when it comes to important decisions
- Consult with those who have different perspectives
- Base decisions on factual information, not on stories and social media
How To Avoid Heuristic Bias While Selecting Stocks:
- Conduct thorough research and rely on facts over gut feelings
- Seek diverse and reliable sources of information
- Avoid overweighting stocks due to their popularity
What Do You Think?
Have you ever thought about getting into the stock market? How would you diversify your portfolio to maximize profits and minimize losses? Would you be a risk-taker or more conservative when selecting stocks?
Resources
https://www.investopedia.com/terms/n/nyse.asp
https://www.emerald.com/insight/content/doi/10.1108/JAMR-03-2024-0093/full/html?skipTracking=true
https://en.wikipedia.org/wiki/New_York_Stock_Exchange
https://www.emerald.com/insight/content/doi/10.1108/QRFM-04-2017-0033/full/html
Podcast On Financial Literacy
From That’s That. Podcast