The Problem

How often do you feel like shouting out loud; “I knew it all along” on a day when the markets rebound after you have sold the scrip that was so attractive? Also known as hindsight bias, the trouble with such a view is that one tends to believe they can foresee things and act accordingly. The pitfall is that most often the decisions taken are unfavourable. The most common outcome—exiting a stock, because you see no growth in it, only to realise a few weeks down that its price is only going up. A few such experiences tend to ingrain the feeling of invisibility when it comes to making predictions. However, the success rates are far lower than reality with such people.

Example

Exiting an investment earmarked for an event five years later because there is an overall dip in the markets is a bad idea. Likewise, betting on sector that is out of favour because you feel it is cheap is an avoidable mistake.

Suggested intervention

Taking decisions with your finances is par for course; doing so without mapping it to its purpose has the possibility of unfavourable outcomes. Curb your impulsiveness and take stock of things by taking a step back. If you are unsure of your action, postpone taking a decision. Interact with people who have the patience to stay invested irrespective of market movements. When in doubt, ask someone with a fair knowledge for a better advice before acting on it. Instead of regretting your decision, treat it as a lesson for the future.

Tip

Do not get carried away with your prediction having come true, even when you have not gained from the decision. Remember the phrase, “it’s not timing the market, but time in the market that builds wealth” before you undertake any rash decisions.

Read: Inside the Mind of Investors

olmdesk@outlookindia.com