Emotional biases by investors

1. Investment Biases

2. Endowment Effect
• Become emotionally attached to the winner
stocks that previously gave huge returns
• Reluctant to sell them even if analysis shows
they will drop in intrinsic value
• Chance of occurrence among professional
investors – 25%

3. Regret Aversion
• Afraid of buying too much of a stock even if it
is a good investment
• Reason – So that they can pat themselves on
the back if they’re right while also avoid big
regrets if they’re wrong
• Chance of occurrence among portfolio
managers – 16.67%

4. Loss aversion
• Hold on to losers for too long
• Reason - pain of accepting that you’ve made a
mistake
• Hope that the stock will rebound
• Most common among individual investors
than professional managers

5. Representativeness
• Belief that good company must also be a good
stock, or a mediocre company a bad stock
• Undermining the concept of overpriced and
underpriced

6. How to Avoid it?
• Peer reviews by more objective team
members
• Quantitative models more often to make final
decisions

7. Are Quant models free of bias?
• No, there is bias called Anchoring
• Every quant gets anchored to a few factors,
such as the value or momentum effect
• But even these models are based on some
peoples finding backed by some explanations
• What if these people were wrong in
identifying the reasons for the prices?

8. Source - Bloomberg
• http://www.bloomberg.com/news/2014-04-
07/how-money-managers-fight-their-
emotions-and-sometimes-lose.html

9. @KritiCapital
www.facebook.com/KritiCapital
www.kriticapital.com.np
www.linkedin.com/company/kriti-
capital-&-investments-ltd