Investors who have been in the market for a long time know that investing is an emotional activity as much as it is a financial activity. This is the reason that people who have a higher degree of self-control generally tend to do better than their peers. Self-control bias may seem like an obvious and simple flaw. However, it has a profound effect on the behavior of any investor. The details of the self-control bias have been listed below:
What is Self-Control Bias?
Self-control bias stems from a behavioral flaw called hyperbolic discounting. As per hyperbolic discounting, there is an inherent flaw in the way investors perceive gains. They have a large appetite for short term gains. However, if they are asked to sacrifice short term gains for long term gains which will be much bigger, most will still choose the short term gains. Hence, investors have a skewed time preference, which negatively impacts their decision making. In simple words, investors with this bias are inclined towards spending more today at the expense of saving less for the future.
Self-control bias is not only seen in the financial world. It is also seen in the other walks of our daily life. For instance, people may be unable to lose weight despite knowing that it is in their best long term interest to do so. They may continuously choose to eat unhealthy food despite knowing that it will cause harm to them.
How Does Self Control Bias Impact Financial Decisions?
How to Manage Self Control Bias
The bottom line is that self-control bias is not small or frivolous. Like other behavioral biases, this bias also has a huge impact on the portfolio of the investor as well as the return that they gain from it.
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