Behavioral Bias Backtesting Tool

Understanding Behavioral Biases in Investing

Behavioral finance explores how psychology influences investor decisions and market outcomes. While traditional finance assumes rational actors, real-world investors are often swayed by cognitive biases and emotions, leading to suboptimal financial choices.

What are Behavioral Biases?

These are systematic errors in thinking that affect the decisions and judgments that people make. In investing, they can lead to deviations from a disciplined strategy and significant impacts on portfolio performance. This tool simulates how some common biases might play out over time.

• Fear Of Missing Out (FOMO) / Herd Mentality: Impulsive buying into rising assets due to social pressure or anxiety of being left behind.
• Loss Aversion / Disposition Effect: The tendency to hold losing investments too long (to avoid realizing a loss) and sell winning investments too early (to lock in gains).
• Overconfidence: An exaggerated belief in one's own trading skill or ability to predict market movements, leading to excessive risk-taking or frequent trading.
• Anchoring: Relying too heavily on a past price or initial piece of information when making current decisions.

By backtesting these biases in a simulated environment, you can gain a clearer understanding of their potential impact on your portfolio.