Wise Horse Hans Effect: A Cognitive Bias That Controls Investor Psychology
The Wise Horse Hans Effect: Cognitive Biases That Shape Investor Psychology
Introduction
In investing, calm judgment is obviously important. However, every person harbors cognitive biases—biases in thinking—that can lead to incorrect investment decisions.
What is the Hans-like Effect
The Hans that captivated people in the early 20th century was believed to understand human language and perform calculations. However, later investigations revealed that Hans inferred answers by observing the subtle movements of people nearby. This finding showed that Hans was deriving answers from cues around him.
Hans-like Effect in Investment
In investing as well, we are unknowingly influenced by surrounding information and our own emotions, sometimes making incorrect judgments like Hans did. The following explains examples of Hans-like effects hidden in investor psychology and how to overcome them.
1. Anchoring
A bias where you are strongly influenced by the first piece of information you encounter, causing later judgments to be biased. For example,
- Even if a newly issued stock seems overpriced, you end up buying because of the initial price
- Influenced by a bullish target price from an analyst, you end up buying an overpriced stock
Overcoming
- Collect information from multiple sources, and avoid being trapped by anchoring
- Make calm judgments based on your own analysis
2. Confirmation Bias
Collecting information that only confirms your own beliefs and ignoring opposing views. For example,
- Reading only positive news about a stock you invest in, and ignoring negative information
- Gathering information that justifies your investment decisions, losing an objective perspective
Overcoming
- Actively collect diverse opinions and information, and hold a multifaceted view
- Analyze your investment decisions objectively and do not fear correction
3. Representativeness Heuristic
A bias that involves inferring the whole from partial information. For example,
- Seeing a short-term rise and thinking the stock will keep rising
- Seeing a few successes and thinking you can succeed in the same way
Overcoming
- Base analyses on statistical data and past cases, and perform objective analysis
- Avoid getting caught up in individual cases and understand the bigger picture
4. Overconfidence Bias
Overestimating one’s own abilities and knowledge, underestimating risk. For example,
- Believing your investment decisions are always correct, and not admitting mistakes
- Failing to understand risk adequately, engaging in reckless investing
Overcoming
- Recognize the limits of your knowledge and experience, maintain a humble attitude
- Implement thorough risk management and prepare for the worst-case scenario
5. Groupthink
A bias that leads you to conform with others and lose your individuality. For example,
- Because everyone around you is buying, you buy a stock you haven’t analyzed
- Following the trend and taking on high-risk investments
Overcoming
- Conduct your own information gathering and analysis, and resist following the crowd
- Hold your own opinion firmly and act with confidence
Conclusion
The Hans-like effect is an example of cognitive bias hidden in investor psychology. To overcome these biases, always maintain an objective perspective, thoroughly collect information and analyze, and recognize biases in your own thinking.
In investing, always aim for calm judgment and risk management, and approach with a long-term perspective to achieve success.
