I am developing an AI tool to identify and forecast cognitive biases in investing such as confirmation bias, overconfidence, etc. that is almost ready for testing. After a lengthy journey, the time has come for us to finally witness how effectively it functions in real life.
I was curious about the opinions of the community. In your own investing approach, how do you deal with biases? Have you previously seen something similar in the market? I’m interested in hearing opinions on how AI might alter investing practices and whether it has the potential to make a significant impact.
If you read this, you will notice that most people don’t consider factors like overweighting U.S. stocks, favoring large-cap or tech stocks, performance chasing, hindsight bias, individual stock picking, and dividend chasing, among other things.
There is a reason it’s called the “market portfolio,” and certainly, any departure from the globally weighted market capitalization requires sound reasoning. lowering risk or raising risk by shifting factors. Even so, it still doesn’t excuse a lack of foreign representation.
I agree. For U.S. investors, the only justifiable deviations from the market portfolio especially since the U.S. represents less than 30% of global market cap are adding bonds or tilting toward specific factors.
What I mean is that you should question any deviations you want to make. For instance, if someone says, “I want to lean more toward U.S. stocks,” you should ask, “Why?” Typically, there isn’t a solid justification for that, making it a deviation that’s not worth pursuing.
The underlying assumption is that the market balances out all biases, but I’m not sure that’s accurate. Additionally, if you enjoy picking stocks, then I think more is required. What are your thoughts?
What I am suggesting is that if the entire market is influenced by something like herding behavior, then investing in the index doesn’t allow you to capitalize on recognizing it.
