These Five Cognitive Biases Hurt Investors the Most
There is no shortage of cognitive biases out there that can trip up our brains.
By the last count, there are 188 types of these fallible mental shortcuts in existence, and they constantly impede our ability to make the best decisions about our careers, our relationships, and for building wealth over time.
Biases That Plague Investors
In today’s infographic from StocksToTrade, we dive deeper into five of these cognitive biases – specifically the ones that really seem to throw investors and traders for a loop.
Next time you are about to make a major investing decision, make sure you double-check this list!
The moves that may seem instinctual for the average investor may actually be pre-loaded with cognitive biases.
These problems can even plague the most prominent investors in the world – just look at JPMorgan’s Jamie Dimon!
Biases to Avoid
Here are descriptions and examples of the five cognitive biases that can impact investors the most:
The first piece of information you see or hear often ends up being an “anchor” for others that follow.
As an example, if you heard that a new stock was trading at $5.00 – that is the piece of information you may reference whenever thinking about that stock in the future. To avoid this mental mistake: analyze historical data, but don’t hold historical conclusions.
Recency bias is a tendency to overvalue the latest information available.
If you heard that a CEO is resigning from a company you own shares of, your impulse may be to overvalue this recent news and sell the stock. However, you should be careful, and instead focus on long-term trends and experience to come up with a more measured course of action.
Loss Aversion Bias
No one wants to lose money, but small losses happen all the time even for the best investors – especially on paper.
Loss aversion bias is a tendency to feel the effects of these losses more than wins of equal magnitude, and it can often result in a sub-optimal shift in investing strategy. Investors that are focused only on avoiding losses will miss out on big opportunities for gains.
Taking in information only that confirms your beliefs can be disastrous. It’s tempting, because it is satisfying to see your previous conviction in a positive light – however, it also makes it possible to miss important findings that may help to change your conviction.
No one wants to get left out, but being the last one to pile onto an opportunity can also be cataclysmic. If you’re going to be a bandwagon jumper, make sure you’re doing it for the right reasons.
Animated Chart: The S&P 500 in 2023 So Far
Track the S&P 500’s performance in 2023, including all 500 companies, and the sectors they belong to, in this animated video.
The S&P 500’s Performance in 2023 Q1
With one quarter of 2023 in the books, how has the S&P 500 performed so far?
The index had a tumultuous 2022, ending the year down 18%, its worst performance since 2008. But so far, despite dealing with tight monetary conditions and an unexpected banking crisis, the S&P 500 has promptly started to rebound.
The above animation from Jan Varsava shows the stock performance of each company on the S&P 500, categorized by sector.
Biggest Gainers on the S&P 500
The S&P 500 increased 7.5% during the first quarter of 2023. Though it was led by a few big outperformers, more than half of the stocks on the index closed above their end-of-December prices.
Here are the top 30 biggest gainers on the index from January 1 to March 31, 2023.
|4||Warner Bros. Discovery||59.3%|
|12||Monolithic Power Systems||41.8%|
|14||GE Healthcare Tech||40.5%|
|22||Royal Caribbean Group||32.1%|
|23||ON Semiconductor Corp||32.0%|
|25||Cadence Design Systems||30.8%|
Nvidia shares gained the most of all the companies on the S&P 500 in Q1 2023, posting a staggering 90% return over three months.
As the world’s largest chipmaker by market cap, Nvidia gained from both strong earnings and semiconductor industry performance. It also benefited from the rising prevalence of artificial intelligence (AI) through software like ChatGPT.
Meanwhile, other tech giants Apple and Microsoft gained 27% and 21% respectively over the same time period.
Tech Leads Returns by Sector
The technology sector as a whole was the best performing sectoral index thanks to these big moves, up 21.7% at the end of March.
Shares of other tech-adjacent companies like Meta (formerly Facebook) and Tesla—listed on the S&P 500 under the categories of communication services and consumer discretionary—also had a strong start to the year and lifted their respective sectors.
Meta in particular is up 76% in Q1 2023, continuing its rebound after falling to an eight-year low in November 2022 on the back of better-than-expected fourth quarter results and share buybacks.
Biggest Losers on the S&P 500
On the other side of the S&P 500, the financial sector was rocked by sudden collapses.
Signature Bank and Silicon Valley Financial Group shares lost the most ground in the first quarter, after both banks collapsed, shedding nearly all of their value in a matter of 30 days.
In fact, seven of the 10 worst performers on the index to start 2023 are banks or financial companies. The visualization shows the ripple effect on the market after the collapse of regional banks in March, and the ensuing rout driving the entire sector down 5.6% year-to-date.
Here are the top 30 biggest losers on the index from January 1 to March 31, 2023.
|2||Silicon Valley Financial Group||-99.6%|
|3||First Republic Bank||-88.5%|
|6||Charles Schwab Corp||-36.9%|
|10||Lincoln National Corp||-25.8%|
|14||Citizens Financial Group||-22.1%|
|15||Enphase Energy Inc.||-20.6%|
|16||Baxter International Inc.||-19.9%|
|17||Truist Financial Corporation||-19.9%|
|18||American International Group||-19.8%|
|19||CVS Health Corporation||-19.7%|
|27||PNC Financial Services||-18.8%|
|29||Fifth Third Bancorp||-17.8%|
Despite the tight monetary landscape, traditionally defensive sectors like energy, consumer staples, and healthcare also underperformed the broader index. This is a reversal from market trends seen in 2022.
Investment Trends to Watch for in 2023
Experts predict a pause in U.S. interest rate hikes “sometime in 2023” but it’s unclear when (or at what level) the pause will take place given persistent inflation in the economy.
However, if interest rates level off in 2023, it could be a key momentum maker for the S&P 500. As Barron’s points out, the index tends to rise after hikes are paused.
Meanwhile, the current tumult in the financial sector is fanning the flames of recessionary fears. How effectively regulators manage the crisis might be the story of the year.
Finally, as we have seen in 2023 so far, investor interest in AI has sent tech stocks soaring. Is this a quick fad, or an overarching trend for the year?
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