Our Biased Brains

Heuristics and Biases

A heuristic is often defined as a “rule of thumb,” or mental shortcut. A stop-loss rule is an example of an investing heuristic. Investors can limit their losses at a given price point mitigating the risk that any individual issue may pose to their portfolio. Many investors can recognize when they are on the unfortunate side of a probabilistic determination, or when they face a more significant risk than planned when the price does not reflect their narrative. They then rely on the stop-loss heuristic to overcome the possibility of an undesirable result or analytical misjudgment based on their past experience in similar circumstances.

Biases are tendencies to process some information differently ...

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