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Here are the top ten common investor biases

Stifel Behavioral Finance Director Sneha Jose joins Yahoo Finance Live to discuss common investor biases.

Video transcript

AKIKO FUJITA: Well, "Big Short" investor Michael Burry warned of the losses that are likely to stem from crypto and meme stock trading, tweeting this out last week, saying, "all hype speculation is doing is drawing in retail before the mother of all crashes. When crypto falls from trillions or meme stocks fall from tens of billions, Main Street losses will approach the size of countries." Now, that tweet has since been deleted, but our next guest says there are 10 common threads that are driving the action in both crypto and meme stocks.

Let's bring in our guests, Sneha Jose, Stifle-- or Stifel Director of Behavioral Finance. Sneha, it's good to talk to you. It feels like this is kind of a timely discussion, given what we're talking about in crypto trading today. But walk me through some of the common threads that you're seeing on both sides of the trade.

SNEHA JOSE: Yes, absolutely. I think the timing is perfect because, at times when there is a lot of price action and increased volatility, sort of our ability to react just becomes much stronger. So that means our sort of investor biases could be elevated during such times. And you know, three biases that I would like to highlight are sort of things that we should be mindful, we should be aware of. And one is loss aversion, right? It just hurts twice as much on the way down. Losses loom larger than gains. So we should be prepared, should there be volatility.

The second is FOMO, widely talked about fear of missing out. And we really want to caution our investors to not get trapped, because a lot of them have like emotions like regret to some of these investments. But the reality is that, when you look back at data, time spent in the market is a lot more rewarding than trying to time the market. It's just challenging.

And the third is herd mentality. I mean, with this sort of evolving investment landscape and this interplay between financial markets and social media, herd mentality is a bias that we have to be aware of, because yes, there will be winners, but sometimes, or at some point. there might be a stampede, and there will be people who will get hurt. And buy high, sell low is another thing we would like to sort of remind our investors about. I think at the end of the day, you want to be in a portfolio that gives you good sleep at night and is actually good for your financial health.

ZACK GUZMAN: Yeah, it's interesting to see maybe some people put their life saving-- I mean, we've seen these stories of meme traders putting their life savings into volatile things, like Dogecoin, which is down pretty significantly today. But when you think about that herd mentality piece of investing, I mean, how much of that goes back to kind of the new age of internet investors piling in to thread groups like a Wall Street Bets on Reddit, and how it's driving kind of that herd mentality where you can update it and see it in real time of how your comrades are trading, I guess?

SNEHA JOSE: Yes, no, I think you bring up a really good point. I mean, there are headwinds and there are tailwinds. And sort of the new generation, new era of investors are embracing technology and toolsets. But I think what we are trying to tell our clients is that it's all great to have access to technology and toolsets, but use it to your advantage, where you can sort of get yourself organized. Be aware of sort of the risks you're taking on. You know, have a speculative budget. If you want to really dip your toes in a lot of these investments, have an entry and exit plan.

And try to automate the process so that you get the emotion out of it, and you don't get sort of pulled into it for more longer than, you know, or your comfort zone. So absolutely there are both sides of the coin, but I think for us, the bottom line would be sort of consider your full wealth picture and be diversified. And if you are dipping your toes, sort of measure it and understand the risks associated, because it's easy for us to forget, you know, when you're looking at asset classes move in one direction, it's sort of easy to forget that it can move the other side.

AKIKO FUJITA: How much of the psychology that you've pointed to you think is part of a permanent shift we're seeing in the market? I mean, we're talking about this in the context of crypto trading and meme stock, but certainly there's a lot of people who aren't necessarily putting their money in those spaces that have gotten into the market over the last year because the increased accessibility through apps like Robin Hood.

SNEHA JOSE: Yes, absolutely. I mean, there is a shift in the industry. And I think this is, again, as I remind investors, it's sort of this interplay between financial markets, technology, social media. So yes, the landscape is evolving, but at the end of the day, one needs to consider this sort of as a full wealth picture of yourself. And you have to look within to see what is your comfort level, and not just blindly follow, you know, social media or Twitter tweets and sort of other personalities, because each to his own in terms of comfort level.

And you want to be in a portfolio that you understand fully. And that's where, you know, aspects such as sort of seeking advice, if possible, couldn't hurt. You know, going back to some of the basic principles of investing, i.e. being diversified in your portfolio, will not hurt. And being aware and getting access to good research and understanding what kind of investments that are out there wouldn't hurt, either. So again, it's good principles of investing that those rules don't change, no matter how much the investment landscape evolves.

AKIKO FUJITA: Sneha Jose, Stifel Director of Behavioral Science, it's good to talk to you toda--