1. Fiona Chan
One of the biggest ongoing debates
in economics is the validity of
homo economicus: the idea that
human beings are rational and act
in their own interests.
This concept, which underpins
many economic theories and mod-
els, assumes consumers and inves-
tors make logical decisions for the
sole purpose of maximising their
happiness and profits.
As a consumer, I think I am fair-
ly rational. As an investor, howev-
er, I may be one of the least sensible
people ever.
There are many well-document-
ed biases that investors are prone
to, and unfortunately most of them
apply to me.
Confirmation bias, for instance:
I often make up my mind about
which stock to buy and then look
for proof to support my decision.
I also suffer from overconfi-
dence bias – believing that I am
right more often than I really am –
not just in investments, but general-
ly in life.
But my biggest failings are with
regard to risks and potential losses.
I am highly loss-averse, which
means I feel the loss of $100 much
more keenly than a gain of $100.
Worse than that, I am afflicted
by the so-called “disposition
effect”, which is the tendency to
sell shares that are rising in value
but hold on to those that have fall-
en, in the stubborn hope that they
will one day claw their way back
into positive territory.
In other words, I lack one of the
most basic investing skills: I am psy-
chologically unable to cut my loss-
es. There are, sadly, plenty of exam-
ples to illustrate this, but I shall
give just one. In 2011, I bought one
lot of shipping company Neptune
Orient Lines (NOL) at slightly more
than $1.40 per share.
In lieu of exhaustive analysis, I
had simply noted that NOL’s price
had recently suffered a steep drop
from what I thought of as its “usu-
al” price of around $2, the value it
had held over the previous year.
This is also a bias, known as “an-
choring”, in which an initial
approximation of an object’s value
affects one’s perception of its subse-
quent values. Because I thought
NOL shares were worth around $2,
$1.40 looked cheap to me.
To cut a painful story short,
NOL’s price continued to fall after
my purchase and is now struggling
to stay at around $1.10.
Despite valid grounds to bite the
bullet and sell the stock – continu-
ing red ink, a challenging industry
outlook, possible better use of my
money elsewhere – I simply find it
too painful to convert my paper
loss into a real one.
As I see it, there is a variety of rea-
TURN TO PAGE 41
Men who are older, richer and savvier
are more prone to biases when invest-
ing, a new survey has found.
The study, by three students from
the Nanyang Business School of the
Nanyang Technological University
(NTU), shows that gender, age and
smarts all affect investing bias – some-
times in surprising ways.
For instance, men are more overcon-
fident about their investing ability than
women, according to students Chiang
Jia Bing, Joel Siew and Raymond Toh.
“After a long winning streak, (men)
tend to believe they will consistently
outperform the market and hence trade
excessively,” said the students, who
polled 221 Singapore investors.
“Unfortunately, this leads to signifi-
cant errors as they brush aside subse-
quent mistakes as aberrations.”
Men also suffer more from the dispo-
sition effect, the survey has found. They
sell winning stocks too soon and hold
losing ones too long, leading to lower
gains and larger losses.
Lastly, men are more likely than
women to have “home bias”: a prefer-
ence for investing in local shares over
foreign counters.
Because of this, they overallocate
funds to the local market and forgo
some geographical diversification bene-
fits, the NTU students said.
Older investors are also subject to the
same biases, the study shows. In addi-
tion, investors also tend to fall prey to
loss aversion and confirmation bias as
they age.
Confirmation bias is when investors
seek only proof of their beliefs and ig-
nore contrary data. Loss aversion,
where the pain of losing money out-
weighs the pleasure of profit, skews a
portfolio towards safe investments with
low returns.
Interestingly, investors with higher
income, education and financial litera-
cy are more prone to the overconfi-
dence and disposition effect biases, but
less to loss aversion, the study shows.
The findings are important as inves-
tors led astray by bias may have under-
performing portfolios, said the NTU
banking and finance students, who are
all in their final year of studies.
The students, led by their supervisor,
Dr Kong Yoon Kee, also noted that the
study results are “worrying” because
men tend to be more involved in house-
hold investment decisions and because
Singapore’s population is ageing.
“Investment bias is an important ele-
ment that is often overlooked, and un-
derestimated,” they concluded.
“In the light of this, investor advoca-
cy groups should extend financial edu-
cation to include awareness about in-
vestment biases and their risks.”
Fiona Chan
Loss-averse, overconfident... that’s me
Older, richer, savvier men more prone to biases
Investment biases can
cloud one’s judgment
and lead to lower
gains and larger losses
[ small40 investthesundaytimes May 12, 2013

2. sons people like me shy from cut-
ting our losses.
One is the unshakeable belief
that stocks go up and down in
cycles, and that if you just hang on
long enough, your loss-making
stock will eventually turn into a
profitable one.
But this argument has two prob-
lems. The first is that not all stocks
regain their past highs no matter
how long you wait, and a falling
share price is often indicative of
deeper troubles that portend even
further price drops.
The second problem is that the
money that is tied up in your lan-
guishing investment could be
invested more wisely in other assets
and make up for having to cut your
losses. The $300 or so I’ve lost on
NOL, for instance, could easily
have been made back by now if I
had bought shares in any Singa-
pore bank.
The other reasons for failing to
cut losses are even less justifiable.
Sometimes investors just do not
like to admit when they have been
wrong. If their paper loss is never
realised, technically the stock can
still do a U-turn and prove them
right for holding on so long.
There is also inertia: People tend
to monitor their well-performing
stocks, but ignore those that have
deteriorated beyond a certain
threshold.
I offer my investing story as a
cautionary tale. To avoid following
in my footsteps, I suggest setting a
clear limit for cutting losses and
remembering that after a stock has
lost 50 per cent of its value, it needs
to rise by 100 per cent for you to
just break even.
If all else fails, knowing your
own biases can at least help you for-
mulate a better investment strate-
gy. I now bank on blue-chip divi-
dend yield plays, so even if the
counter falls, my total return may
not be a complete write-off.
The really tragic part of this
whole story is that, according to
recent research done by students at
the Nanyang Technological Univer-
sity’s Nanyang Business School, my
investing habits resemble those of
an old man.
Messrs Chiang Jia Bing, Joel Siew
and Raymond Toh and their super-
visor, Dr Kong Yoon Kee, polled
221 Singapore investors and found
that age and gender are correlated
to certain decision-making biases
(see story on Page 40).
Specifically, they found that the
disposition effect is a quirk of older
male investors, although it is also
the most prevalent bias among all
investors and particularly affects
the higher-educated.
“Cutting losses protects one’s
capital should the investment go
awry,” say the students.
“It is good practice to set cut-loss
levels when initiating investments
and be disciplined in keeping to
them, rather than reasoning that
adverse market movements are tem-
porary and reversible,”
Wise advice indeed. Now if only
I could overcome my bias against
accepting counsel from those
younger than me.
fiochan@sph.com.sg
FROM PAGE 40
Set clear targets for cutting losses
change ] 41investMay 12, 2013 thesundaytimes