The Bias Blind Spot
We are now aware of the fact that investment markets are not driven by mathematical decisions alone. They are heavily influenced by the emotional quotient of investors. In fact, a large number of successful investors attribute their success to their ability to manage their emotions. This is done by understanding the different types of behavioral biases and being vigilant to avoid them. However, the fact is no matter how vigilant one is, one can never totally eradicate behavioral biases. They can only be managed. This is because each and every investor has a bias blind spot. In this article, we will understand the meaning of the term bias blind spot as well as how it impacts decision making.
What is a Bias Blind Spot?
Bias blind spots are a psychological phenomenon that can be described using the term tunnel vision. In simple words, it means that people have the tendency to overlook a lot of information and focus on certain things. In psychological terms, this is considered to be a necessity. This is because human beings are constantly bombarded with so much information that if they pay equal attention to all of it, they wouldn't be able to get anything done. Hence, as a result of evolution, people subconsciously omit certain information from their analysis while they are making decisions. This phenomenon is particularly dangerous when people are investing. This is because people are programmed to think in certain ways. Even if they are made aware of their bias, when the time comes to make a decision, they fail to check whether they are acting in a biased manner.
How Bias Blind Spots Affect Decision Making?
Bias blind spots have a major impact when it comes to investment decision making. Some of the details have been explained below.
- Impossible to Get Rid of Bias: The existence of bias blind spots means that investors can never be sure that their decisions are based on rationality, and there is no emotional or irrational behavior involved. Since there are blind spots present in the investors' thought process, even if they make all attempts to remove bias from their behavior, there will always be some bias present. The existence of blind spots means that behavioral biases can be minimized but not completely eliminated.
- See More Bias in Others: The existence of bias blind spots does not mean that the investors are not able to understand the concept of behavioral biases. Most investors understand these concepts on a cognitive level. They are also able to identify the existence of such biases in the behavior of other investors. However, when they make their own decisions, they often do so subconsciously, and hence even though they are able to comprehend the bias, they are not able to avoid them. This blind spot bias is the reason that all people seem to think that they do not have a particular bias, whereas many other people do!
- How Blind Spots Impair Decision Making: Bias blind spots tend to give investors an air of overconfidence. This creates a problem since investors start believing that others are prone to making irrational decisions because of bias, whereas they are not. This kind of thinking leads to investors making an attempt to time the market or beat the market. Anyone who studies finance knows by now that both these strategies are not risk-free.
How to Avoid the Blind Spot Bias?
The only way to avoid the blind spot bias is by taking inputs from a different person. Each person has their own set of biases. Hence, when you consult a different person, they may give you a point of view that is completely different from yours. By consulting another person and then by patiently listening to their advice, one can identify some of the implicit assumptions being made during the calculations. These implicit assumptions are the ones that are the root cause behind the blind spot bias. Discussion with other people helps to bring these biases to the fore.
Education also plays an important role in overcoming the blind spot bias. Hence, it would be fair to say that investors who are well-read and who are analyzing their own behavior while investing are less prone to blind spot bias. However, it is important to reiterate the fact that blind spot bias is merely a way to reinforce the thought that behavioral biases can only be minimized. It is impossible to completely eliminate them from one's thinking.
Hence, the bottom line is that the blind spot bias is not a bias in itself. However, instead, it is a tendency which defines how we look at other people's bias with clarity while neglecting the very same behavior in ourselves while making investment decisions.
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- Heuristics and their role in Finance
- Advantages of Behavioral Finance
- Limitations of Behavioral Finance
- FAQs About Behavioral Finance
- Prospect Theory
- How Loss Aversion Affects Investment Decisions
- The Sunk Cost Fallacy
- The Endowment Effect
- Regret Aversion Bias
- Self-Control Bias
- Anchoring Bias in Behavioural Finance
- Confirmation Bias in Behavioral Finance
- Herd Mentality Bias
- Mental Accounting
- Recency Bias
- Overconfidence Bias
- Conservatism Bias
- Framing Bias
- Behavioral Portfolios
- Hindsight Bias
- Illusion of Control Bias
- Status Quo Bias
- Sample Size Neglect
- Optimism Bias
- Cognitive Dissonance Bias
- Home Country Bias
- Availability Bias in Behavioural Investing
- The Bias Blind Spot
- The Narrative Fallacy
- The Planning Fallacy
- Base Rate Fallacy
- Contrarian Investing
- Cultural Influences on Financial Decisions
- Behavioral Life Cycle Theory
- The Barnewall Model
- Bielard, Biel and Kaiser (BBK) Model
- Three Dimensional Pscychographic Model
- Categorizing Behavioral Biases
- Lessons Learned in Behavioural Finance