The Psychology of Loss Aversion and Confirmation Bias

One of the important factors in investing is the psychological aspect.
The following is an explanation of loss aversion and confirmation bias psychology.

1. Loss aversion
Loss aversion refers to a situation where an investor cannot bring themselves to turn an unrealized loss into a realized loss when an investment product shows a valuation loss.
When a stock you hold is showing a loss, simply hoping for the price to rise without any analysis means risk management is not being carried out.
[The right investment attitude]
An important goal of investing is to minimize losses and maximize profits.
You should not be afraid to cut your losses when a loss occurs; cutting losses is an essential part of investment principles.

2. Confirmation bias psychology
Confirmation bias refers to the tendency to accept only news that is positive for you.
Investors tend to listen only to positive opinions about the stocks they have invested in and tend to ignore negative opinions.
[The right attitude for investors]
Such stubbornness may eventually lead to profits, but it cannot be considered the right investment attitude.
Continuing to invest with this mindset can lead to large losses.

3. The relationship between loss aversion and confirmation bias
People who struggle with loss aversion usually also have confirmation bias. When these tendencies are strong, there is a high probability of suffering a large loss in a single investment.
4. Successful investing
For successful investing, risk management is the most important thing. To achieve this, you need to set and practice personal principles that can help you overcome these psychological tendencies.
5. Investment style
If you understand your investment style and find it hard to control your psychology, gaining experience through realistic mock investing is a good approach.