Positive bias refers to the inclination of an individual to perceive information or experiences in a favourable manner. It is a cognitive bias and can influence how we make decisions. Positive bias can have both a positive and negative impact when it comes to our investment decisions. For example, the property you have just purchased will increase in value because you want it to, irrespective of wider market conditions! It is important that you are aware of this when managing your portfolio.
Negative impacts
- Overconfidence
Positive bias can make an investor overconfident in their abilities and, potentially, more optimistic about their investments. Consciously or subconsciously, this can mean that they take on more risk than they should. Alternatively, they may miss warnings or potential downside risk.
- Downplaying risks
Investors with a positive bias may focus more on the positive aspects of an investment, such as potential gains (potentially what they want to happen), rather than managing downside risks. They may downplay or overlook the risks associated with their investments.
- Confirmation bias
An investor may lean to research that supports their opinion rather than digesting all available information. They may also dismiss or ignore information that doesn’t support their view. This can lead to a narrow and biased view of the investment.
- Chasing performance
A positive bias may also lead an investor to chase a high-performing investment. For example, a particular investment has performed well in recent times. This investor would then buy this investment in anticipation that the performance would continue. The good news may have already been factored into the current price. This can result in buying at elevated prices or within an unsustainable trend.
- Not diversifying
Positive bias may lead an investor to become overly focused on one particular investment, sector or market. In turn, this may mean that they do not focus on other parts of their portfolio or do not diversify as well as they should. The impact of this may be increased losses if the overweight investment, sector or market underperforms.
Positive impacts
- Confidence & motivation
Within limits, positive bias can help increase confidence and motivation. This can lead to increased engagement and stability in decision making. A positive attitude is always a good thing!
- Resilience
A positive bias can also help investors maintain a longer-term perspective. At times of inevitable market volatility, it can help the investor remain invested and contribute to resilience.
Summary
A positive bias will always exist when making investment decisions. However, it is important for you to maintain a balanced and realistic perspective. This can be achieved by having a clear strategy in place, conducting thorough research and maintaining a well-diversified portfolio.
W2 wealth manages a range of portfolios, built to meet individual client needs. We can provide you with structure, advice and ease of management. Essentially, we can take the emotion out of investing for you and help negate the negative impacts of a positive bias!