Share Synthesis

I have been researching on the behavioral finance subject quite intensively recently as I believe this is one important area which I used to overlooked. Behavioral finance studies the potential decision making errors that  individuals can introduce into the investment process so by understanding the biases, it can help me learn about common decision-making mistakes.

Following are the list of biases I consolidated from an online article I came across..
Details can be found here .


- Optimism :  Unbalanced focus on “best-case” scenarios
- Regret Aversion :  Failure to make decisions out of fear of future regret.
- Overconfidence :  Excessive confidence in one’s ability to predict and make decisions.
- Cognitive Dissonance :  Using rationalizations to avoid change acceptance.
- Self-Attribution :  Attributing success to skill and failure to chance.
- Confirmation :  Focusing attention on information that confirms one’s beliefs.
- Hindsight : Exaggerated memory of one’s conviction about historical choices.
- Loss Aversion : Avoiding choices that may result in loss.
- Endowment : Favoritism based upon feelings of ownership.
- Illusion of Control :  False belief in one’s ability to control outcomes.
- Status Quo :  Resistance to change.
- Anchoring : Adjustment  Attachment to previous forecasts.
- Representativeness :  Allowing past experience to influence the interpretation of new information.
- Availability :  Favoring easily accessed information over full information.
- Conservatism :  Failure to fully recognize the value of new information.
- Recency :  Interpreting recent observations out of historical context.
- Ambiguity Aversion : Avoiding risk during periods of uncertainty.
- Mental Accounting : Innapproriately grouping assets before evaluating their characteristics.
- Framing : Varying a decision process based on a chosen context.

I am victim to most of the biases mentioned above.. i.e anchoring, I tend to derive an estimated value close to the present value as support in face of uncertainty If so, does that mean estimated values are only as useful as random number? Worse, occasionally I tend to use these value to reinforce my decision to buy stocks.

In my current system, I am using an estimated value to derive the entry and positioning so a question I'm asking myself is that, are absolute valuations derived from models like dcf applicable to the market? Is it better to use relative valuation instead or even so, don't use any?

Is there anyway to invest based on the difference between thinking and reality? Well, all the answers to the questions are still uncertain to me and I hope I can be enlightened soon by reading more or by any readers who are reading my posts.