Bias

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Financial Terms and Glossary

Bias

Bias refers to a systematic deviation or prejudice in favor of or against one thing, person, or group compared to another, often in a way considered to be unfair. In finance and economics, bias can manifest in various ways, such as investor biases (like overconfidence or loss aversion) that affect decision-making. Biases can lead to systematic errors in judgment or behavior, impacting everything from individual investment choices to broader market trends.

Example

An investor may have a confirmation bias, where they only seek out information that supports their existing beliefs about a stock, ignoring evidence that contradicts those beliefs.

Key points

• Bias is a systematic deviation that leads to unfair or irrational decisions.

• Common in investor behavior, affecting decision-making and market trends.

• Understanding bias is essential for making informed and rational financial decisions.

Quick Answers to Curious Questions

How does bias affect investment decisions?

Bias can lead to irrational decision-making, such as favoring information that confirms existing beliefs (confirmation bias) or being overly optimistic about market trends (optimism bias).