Page 155 - A Canuck's Guide to Financial Literacy 2020

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Behavioral Finance

When it comes to investment choices, keep in mind possible biases. The Behavioral
Finance Theory states that when it comes to decision making, investors act rationally via
objective thinking and logic. However, investors may also act irrationally by not being aware
of their biases and how they process information. This allows them to make sub-optimal
decisions.

Common Biases of Behavioral Finance

• Overconfidence

Overconfidence bias refers to investors who believe that they’re better than average.
It’s a tendency to hold false assessment of our skills, intellect or talent. It’s an
egotistical belief.

When investing, be mindful of behavioral finance, particularly self confidence. The more
confident you are, the higher the cost of a mistake.

• Self Attribution Bias

Refers to investors who attribute their successes to their own personal skills and
failures to factors beyond their control. Make sure you identify your strengths and
weaknesses when trading as it can help you avoid self attribution bias.