4 Psychological Traps Investors Should Avoid

Here, we take a look at eight common psychological traps that investors can fall victim to, as identified by behavioral finance.

1. Anchoring Trap
First, there is the so-called anchoring trap, which refers to an over-reliance on what one originally thinks. For instance, if you think of a certain company as successful, you may be too confident that its stocks are a good bet. This preconception may be totally incorrect in the prevailing situation or at some point in the future.

In order to avoid this trap, you need to remain flexible in your thinking and open to new sources of information, while understanding the reality that any company can be here today and gone tomorrow.

2. Confirmation Trap
Make sure you get objective advice from fresh sources, rather than consulting the person who gave you the bad advice in the first place. If you find yourself saying something like, ""Our stocks have dropped by 30 percent, but it’s surely best just to hang onto them, isn’t it?"" then you are seeking confirmation from some other unfortunate investor in the same situation. You can comfort each other in the short run, but it’s just self-delusion.

3. Relativity Trap
The relativity trap is also there waiting to lead you astray. Everyone has a different psychological make-up, combined with a unique set of circumstances extending to work, family, career prospects and likely inheritances. This means that although you need to be aware of what others are doing and saying, their situation and views are not necessarily relevant outside their own context. Be aware, but beware too! You must invest for yourself and only in your own context.

4. Superiority Trap
For some people, the superiority trap is extremely dangerous. A lot of investors are overconfident ant think they know better than the experts or even the market. Just being well-educated and/or clever does not mean you wouldn't benefit from good, independent advice. Also, it doesn't mean you can outwit the pros and a complex system of markets either.