By this time everyone in finance and economics knows and accepts that there are behavioral biases embedded in our decisions. We will make mistakes. We are human but strive for rationality. The list of behavioral biases is always growing and constantly being sorted and grouped, yet many biases are in conflict, so it is not always unclear what is driving decisions. We also do not have a solution to behavioral biases other than to note that they will occur, and we should beware. Acknowledge bad behavior and stop it.
The book Misbelief: What makes Rational People Believe Irrational Things by Dan Ariely is the next level of thinking about behavioral biases. Taken to some extreme, these biases will lead to misbeliefs and the acceptance of ideas and "facts" that are not true. Our biases can also distort fact or focus on only some facts to create misbeliefs. Behavioral biases can lead more than just the occasional mistake.
The reason for misbeliefs is within us and is driven by emotions, cognition, personality, and the social environment. Our biases will not lead just to poor decisions but make rational people develop irrational beliefs that will create a world driven to an altered reality. Ariely would say there is a funnel of misbelief which starts with our emotions and leads to cognitive mistakes. These mistakes can start to alter our personality. We will only look for what confirms what we want to belief. Once we focus on these misbeliefs, we look for others to help validate our thinking.
Yes, these misbeliefs can occur with investment ideas which is why it is so important to be driven by the facts and challenge our thinking. Let a model serve as our null and as a guide.
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