A uniquely flawed part of our humanity is our inherent bias toward certain things. For example, I am incredibly biased toward hot oat milk lattes.
As an investor, however, bias can stunt growth and prevent us from seizing the biggest, boldest, and best opportunities or falling victim to an epic boondoggle.
The following are the 10 most common investment biases I try to steer clear of.
1. Overconfidence – It’s good to think positive. Without optimism, VC doesn’t exist. However, it’s equally important to not let emotion reign over our decision-making.
2. Overplanning – Plans never map perfectly to the desired outcome. We must be able to choose intelligent alternatives when the unexpected inevitably happens.
3. Over-confirmation – The cynic can be a VC’s best friend. Look and listen for opposing views to make sure you’re not overlooking something critical.
4. Herding – If everybody wants in, we NEED to buy, right? After all, nobody wants to miss out on the next big thing. Truth be told, for every Apple, Amazon, or Facebook, there are thousands of busts. Be careful not to pay an exorbitant price for something everybody wants.
5. Anchoring – Avoid snap judgements based on limited information. Think about all variables and make informed decisions.
6. The Illusion of Complete Control – Luck and randomness will always play a role in investing. Focus on what you can control.
7. The Halo Effect – Always look beyond what’s in plain sight. An investor who sees what others don’t is what we call a VISIONARY.
8. Stories over Analysis – Everyone loves a good story, unless it’s about a “revolutionary” startup that isn’t quite as innovative as we were told. Perform due diligence and investigate the details of every opportunity.
9. Track Record Is Everything – A proven track record is a great thing, but it’s not the ONLY thing.
10. Recency – People tend to fall in love with the last thing they saw. For instance, it’s likely that this form of bias will be the one people remember most and therefore, consider the most important 🙂
The larger point is that we’re all human, so we all have biases, but awareness is key.
With awareness, we can focus our efforts on eliminating them or at least diminishing their impact.
You know what? That’s not such a bad rule for life as well as investing 🙂
Have anything to add to the list?
