Background
Aldar Properties PJSC is a real estate organization founded in 2004 by the Chairman of Abu Dhabi Global Market (ADGM), Ahmad Ali Al Sayegh, and first listed on the Abu Dhabi Stock Exchange (ADX) in 2005. The company is one of the leading estate agencies, as it owns strong management and investment capabilities. Since its emergence on the market, Aldar had developed several major projects on the island, including Ferrari World and Yas Marina circuit. Aldar’s crucial activities comprise property development and management, real estate asset management, and adjacent businesses.
Aldar Properties focuses on creating and realizing innovative projects such as the remarkable HQ building located in Al Raha Beach or the Gate Towers on Al Reem Island. The company’s shares can be obtained on the Abu Dhabi Stock Exchange, and they provide recurring revenues and profits from different stakeholders. Aldar acts upon high standards and pursues to sustain a long-term business and provide high-quality values to its stakeholders. The organization seeks to enrich the lives of residents by creating diverse destinations. This paper aims to explore the most common biases, heuristics, and traps that affect the process of decision-making within the sphere of education.
Introduction
The sphere of investment that Aldar concentrates on is one of the main concerns of the company. Therefore, there are several steps related to the investment process.
- The investment policy is the initial stage of the investment process, and it determines the objectives and assesses the process. The investor must assure that they have the liquidity system, emergency funds, and ensure the assets are convertible.
- The investment analysis stage presupposes analyzing the type of industry, kind of stocks, the future prices of assets, associated risks, forecasted benefits, and possible returns.
- Valuation of securities is the third crucial step as it allows valuating the assets and the benefits one can obtain from the stocks. Comparing the assent one owns with the current market price makes it possible to identify whether the asset is attractive enough.
- Construction of portfolio. The final step is constructing a portfolio where the investor determines whether the analyzed concepts would satisfy the set objectives. If some parameter deviates from the preferable outcome, then the investor may choose the alternate proposal.
Biases Affecting the Investment-Related Decision-Making Are Described in the Following
Typically, sensible managers reflect upon decision-making and assess the plan, because sometimes thinking may be faulty.
Anchoring Bias
Anchoring, a cognitive bias, is based on the initial impressions and estimates, which anchor the subsequent information. Therefore, further forecasts and figures respectively depend upon primary judgments, which are the foundation of the final decision. On the second step, while making a decision, the investors tend to rely on available information while establishing a share price. As a result, investors of Aldar may base their investment decisions on whether or not the share price is trading at a discount to the assessment of intrinsic value, and they do not know where the share price was in the past.
How to Avoid Anchoring
The investor must seek a broader perspective and be more open-minded to take into consideration more points of view. Moreover, one must try to consult the problem on their own not to be anchored to their ideas and thoughts. One must also avoid pinning their advisers, consultants, and others from whom they solicit information.
Overconfidence Bias
In behavioral finance, overconfidence bias plays an enormous role as it affects the majority of decisions. “Overconfidence is a psychological bias that directs an investor to think a parameter which is more significant than it is, and it also assumed that an individual’s judgments are worsened and wrong” (Madaan & Singh, 2019, p. 56). According to Kumar and Goyal (2015), “overconfidence is a well-established and common bias that makes people too confident about their knowledge and skills and ignore the risk associated with investment” (p. 90). This bias makes the invertor underperform, thus, causing the wrong distribution of resources. A clear example is when overconfidence increases the expected volume of trades and market depth and decreases the utility of traders.
How to Avoid Overconfidence
One must trade less and invest more because the trading activities imply trading against robots and computers, which are better data-stocked. By investing in more significant amounts, one is likely to obtain more wealth. Moreover, one must logically evaluate the situation and distribute resources in the right way to avoid mistakes.
Herding Behavior Bias
Herding is vividly observed in the financial market. Researchers assure that it is typical to refer to or copy someone’s conduct due to human nature (Madaan & Singh, 2019). “At the presence of herding, investors do not act rationally in their investment choices (Madaan & Singh, 2019, p. 57). It signifies that an investor while relying on others’ decisions, refrains his own. This bias is widely observed during market distress. For example, when the investor acquires the stocks ignoring the economic principles of demand and supply, it leads them to faulty decisions.
How to Avoid Herding Behavior
First and foremost, the investor must not time the market, which means that one does not need to rely on future predictions concerning the prices of stocks and the forecasts of others. Therefore, the best idea is to invest not 100$ a week rather than 1000$ at once. Furthermore, there should be a set of rules concerning investment, as only disciplined actions will allow one to avoid this trap.
Disposition Effect Bias
The effect assumes that when an individual holds losses, it makes them underperform while winning makes them outperform. The disposition effect is the propensity of investors to refrain from realized loss in expectations of realized gains (Aspara & Hoffmann, 2015). Chiefly, this effect causes negative financial consequences as the prevalent part of investors tends to lose. For instance, the investor of Aldar may realize losers at the end of the year for the tax purposes to boost, or they can neglect the tax considerations to realize gains.
How to Avoid Disposition Effect
The investors should sell underperformed stocks and hold outperformed assets. As a result, the winning assets would further help them to gain more profit. Moreover, the implementation of such a technique called “hedonic framing” allows avoiding such a trap (Knuttson, 2017). This approach implies viewing several losses as a single loss and several gains as a single grand gain. Thus, investors tend to think of their investments as a process of achieving some goal.
Challenges of Implementation
- Investors must thoroughly identify and analyze the chief biases to avoid further emergence of problems in deciding on creating a portfolio of investments.
- The investor should diversify their portfolio, that is, to include different kinds of stocks or assets, as insufficient diversification may cause tragic losses and the emergence of more behavioral and cognitive biases.
- Blindly crowd-following causes discrepancies; therefore, the investor must think accurately to avoid making poor decisions.
- Overconfidence is another challenge as it presupposes that investors will always be aimed at having permanently right choices.
- Investors should seek accurate information as the lack of proper data does not allow making an investment decision.
- Long-term decisions should be the main focus of investors.
Conclusion
In conclusion, it is relevant to state that every decision-making process deals with traps and biases that can be avoided. The sphere of investments chiefly deals with the psychological biases based on the ability to overestimate or underestimate the outcomes. However, the most efficient option to make a decision is to be aware of the existing prejudices and implement the methods to reduce their impact on the process.
References
Aspara, J., & Hoffmann, A. O. I. (2015). Selling losers and keeping winners: How (savings) goal dynamics predict a reversal of the disposition effect. Marketing Letters, 26(2), 201-211. Web.
Knuttson, H. (2017). Advocacy Coalition Learning. Biases and Heuristics in Policy Implementation, Statsvetenskaplig Tidskrift, 119(1), 163-183.
Kumar, S. and Goyal, N. (2015), Behavioural biases in investment decision making – a systematic literature review, Qualitative Research in Financial Markets, 7(1), 88-108. Web.
Madaan, G., & Singh, S. (2019). An analysis of behavioral biases in investment decision-making, International Journal of Financial Research, 10(4), 55. Web.
Shabnam, M. (2018). What Do Heuristics Have to Do with Policymaking?, Journal of Behavioural Economics for Policy, 2(1), 69-74. Web.