ISA season and the new tax year are as good a time as any for a spot of portfolio spring cleaning. But in making the decisions to add new positions and cut back others, there are potential pitfalls to be aware of. Billions of years of evolution have wired humans to think and act in certain ways - but they’re not always well suited to the stock market.

Psychologists have identified hundreds of cognitive errors and emotional biases at work in the human mind. For the most part, they fall into two categories:

  1. Cognitive pitfalls that lead us into defective reasoning.
  2. Emotions (like loss aversion and overconfidence) that lead to bad decision making.

The good news about the first group is having them pointed out is apparently often enough to overcome them. With that in mind, there’s a subset of those pitfalls that are of particular interest to investors. They fall under the banner of Belief Perseverance, or cognitive dissonance.

One look at the phrase Belief Perseverance will probably have some investors nodding knowingly. These are the subtle cognitive errors that lead us to cling on to beliefs, opinions and convictions even in the face of overwhelming evidence to the contrary - and they can be costly.

Let’s have a closer look...

1. Confirmation bias

We’ve covered it before, but Confirmation bias is a big challenge for investors. After making a decision, it leads individuals to gravitate to information and opinion that agrees with what they already think. In simple terms, there’s a risk of falling in love with a stock and losing all objectivity about it.

With easy access to vast amounts of information and discussion on the internet, it’s never been easier to seek out and find confirming views. With broker research becoming more increasingly accessible, it’s equally possible to find comfort in the words of favourable analysts. But these too are prone to cognitive errors (see Conservatism bias next).

The associated risks are huge. Confirmation bias can create a false sense of confidence and a willingness to join herds of other besotted investors who are seduced by a story. Contrarian investment strategies (such as those used by David Dreman) have been created to take advantage of those suffering from Confirmation bias, so avoiding it is essential.

2. Conservatism bias

Conservatism bias is when individuals prioritise their original beliefs and expectations even if new…

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