Type Bias Description Effects Guidelines

Cognitive Conservatism Bias ▪ Belief perserverance bias ▪ Low update ▪ Beware of bias
(Belief Perserverance) ▪ Maintain previous views, inadequately treat new info ▪ Keep previous wrong idea ▪ Properly analyze new info
▪ Statistical & Information-processing errors ▪ Hold securities longer ▪ Work as team

Cognitive Confirmation Bias ▪ Belief perserverance bias ▪ Bad criteria for investment ▪ Actively seek out information
selection challenging your believes
(Belief Perserverance) ▪ Look for what they believe, ignore the rest
▪ Under-diversified portfolios
▪ Selective exposure, perception, and retention
▪ Disproportionate amount of
assets

Cognitive Representativeness ▪ Belief perserverance bias ▪ Forecast based on new infor ▪ Be aware
or more sample
(Belief Perserverance) ▪ Classify new information based on past exp ▪ Drifting styles?
▪ Cognitive cost
▪ Base rate neglect ▪ Diversification
▪ Sample-size neglect ▪ Recent performance not
really that important

Cognitive Illusion of Control ▪ Believe they can control the outcomes while that’s ▪ Excessive trading ▪ Seek contrary viewpoints
impossible
(Belief Perserverance) ▪ Holding concentrated ▪ Keep record
portfolio (less diversified)

Cognitive Hindsight ▪ See past events = predictable and reasonable to expect ▪ Poorly reasoned decisions ▪ Keep record
(Belief Perserverance) ▪ Selective memory of past events, remember successes ▪ Poor results of well-reasoned ▪ Manage expections
and forget errors decisions
▪ Overestimate themselves
▪ False sense of confidence

Cognitive Anchoring & ▪ Information-processing bias ▪ Biased estimation ▪ Anchor needs research and
Adjustment solid basis
▪ Envision some initial numbers – the anchor ▪ Undue weight on ancho
(Information
▪ Adjust the anchor to reflect new infor ▪ Stick too closely to original
Processing)
estimates

Cognitive Mental Accounting ▪ Treat one sum of money differently from another same ▪ Suboptimal portfolio ▪ Use spreadsheet to account
sum of money for all assets
 (Information ▪ Neglect opportunities to ▪ Focus on total return
Processing) decrease risks with low
correlation
▪ Irrationally distinguish
returns from income and
capital appreciation

Cognitive Framing Bias ▪ Answer a question differently based on how it is asked ▪ Misidentification of risk ▪ Focus on future prospect
tolerance
(Information ▪ The formulation of the problem ▪ Neutral and open-minded
Processing) ▪ Suboptimal investment
▪ Excessive trading

Cognitive Availability Bias ▪ Rule of thumb & mental shortcut ▪ Choose investment based on ▪ Develop appropriate IPS
ads
(Information ▪ Choose outcomes based on how easy it comes to mind ▪ Good research
Processing) ▪ Fail to consider alternative
▪ Retrievability, categorization, narrow range of exp, ▪ Focus on long-term results
resonance ▪ Fail to diversify
▪ Fail to achieve appropriate
asset allocation

Emotional Loss Aversion Bias ▪ Strongly prefer to avoid loss vs achieving gains ▪ Limit upside profits ▪ Discipline
▪ Utility of a gain < utility of a loss avoided ▪ Disposition effect: ôm lỗ
già, chốt lãi non
▪ Trade excessively
▪ Hold riskier portfolios
▪ House Money effect: đang
lỗ thì risks = cơ hội, đang lãi
thì risks là threat
▪ Myopic Loss Aversion:
stocks & bonds = different
mental accounts, when
presented in the same frame,
tend to adopt more
conservative strategies
 proba. Of experiencing a
loss tăng khi evaluation tăng
  overtime, càng lúc càng
pursue lower level of risk

Emotional Overconfidence ▪ Self-attribution (self-enhancing: lãi thì credit mình + self- ▪ Underestimate risk, ▪ Review trading record
protecting: lỗ thì đổ lỗi cho cái khác) overestimate returns
▪ Be objective
▪ Prediction overconfidence: confidence interval = too ▪ Poorly diversified portfolios
▪ Perform post analysis
narrow than justified
▪ Excessive trade
▪ Certainty overconfidence: proba. of outcomes = too high
▪ Lower return

Emotional Self-control bias ▪ Fail to have sufficient savings for the future ▪ Accept too much risk for ▪ Proper investment plan and
return budget
▪ Short-term satisfaction > long term goals
▪ Imbalance porfolio allocation ▪ Discipline

Emotional Status quo ▪ Choose to do nothing instead of making a change ▪ Portfolio with in appropriate ▪ Quantify the risk-inducing &
risks; return-enhancing
advantages of diversification
▪ Fail to explore other
opportunities ▪ Proper asset allocation

Emotional Endowment bias ▪ Value assets more when hold rights to it ▪ Fail to sell & replace assets ▪ Moderate the familarity
▪ Inappropriate allocation ▪ Buy small of unfamilarity

Emotional Regret Aversion Bias ▪ Avoid making decision out of fear the decision will turn out ▪ Too conservative ▪ Education
poorly
▪ Herding behavior ▪ Efficient Frontier research
▪ Error of omission: regret from action not taken
▪ Error of commission: regret from action taken

Emotional Naïve diversification ▪ 1/n allocation ▪ ▪

Emotional Home bias ▪ Invest high proportion to domestic invesments ▪ ▪

Emotional Social proof bias ▪ Follow the belief of a group ▪ ▪