Explain biases based on psychological characteristics:
- Prospect theory: fear losses much more than they value gains => hold on to 'losers' too long & sell 'winners' too soon. 'cos utility depends on deviations from moving reference points rather than absolute wealth.
- Overconfidence in forecasts => overestimate growth rates for growth co. & overemphasize good news while ignore negative news for the firms.
- Confirmation bias: => lead to: look for information that supports their prior opinion. eg.: consider growth co. <=> growth stock, cyclical co. vs cyclical stock, defensive co. & defensive stock...
- Noise traders: make price volatile without relevant information 'cos have no OWN opinion, tend to follow newsletter writers who in turn, also "follow the herd"
- Escalation bias => put more money into a failure (eg. "averaging down" strategy). Solution: ignore sentiment; reevaluate the stock: was there any bad new missed in the initial valuation? or if its valuation is confirmed, acquire more of this 'bargain'.
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~ Jan 09, I read a graduation thesis 'bout this topic. @ that time I thought that it was funny, stupid. IMO, finance market is for quantitative method, complex model, lots of math, formula, etc.
Hic. Til now I've realized its meaning (although I don't remember what mentioned in the thesis).
Vnese calls it "ếch ngồi đáy giếng".
