Reference Class Forecasting: Investors should judge new investment products by comparing them with past profits, yielded by investment products belonging to the same asset class Asset Class Assets are classified into various classes based on their type, purpose, or the basis of return or markets.

Simply put, don’t make the same mistake twice. Heuristics is the ability to recall negative occurrences from the past to make sensible choices in the future.

Availability Heuristic: Don’t forget unpleasant experiences.

Look out for products that offer consistent returns over the period-avoid products that claim high gains in a short period.

Compounding: One must analyze the risk associated with every investment.

Learn from Others’ Failures: It is necessary to consider the negative experiences of others before deciding.

Instead of focussing on profits all the time, one can make decisions to avoid losses. Loss Aversion: Accepting failures, just like one accepts success, can help mitigate biases.One must understand that every event has a probability of ending negatively or positively. Think Rationally: Being practical is not an option it is a necessity.The following steps can help avoid optimism bias: When a negative event occurs, biased individuals are ill-prepared. Eventually, stock prices fell by almost 30% in the initial trading week-Hugh incurred a huge loss. He overlooked the fact that stock prices can even go down. Hugh had an optimistic bias-he blindly believed that his investment would yield record-high returns.

Hugh, however, invested without attempting any analysis. read more to raise funds and clear debts Debts Debt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange. It was releasing an IPO IPO An initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time.

He comes across XYZ Limited the company was popular, but its finances were down. Let us assume that Hugh is an investor looking for the right IPO. Now, let us understand the effect of optimism bias in investments: Later, the country faced back-to-back COVID-19 waves, for which it was totally unprepared. The government was under the illusion that the economy Economy An economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society. In October 2021, the US government considered the pandemic a short-lived one. This bravado was not backed by any facts whatsoever, most ended up in a hospital. For instance, during the Covid pandemic, many people believed that they wouldn’t get infected and stopped following instructions. Optimism bias makes people careless-they stop taking precautions.