Even the most seasoned investors are prone to their influence
In a battle between the facts and biases, our biases often win. That’s because investment decisions are often influenced by behavioral biases that most people are unaware of. If we acknowledge and learn to recognize these tendencies, we may be able to avoid some poor choices when it comes to investing outcomes.
Here are some common examples of bias creeping into our investment decision making.
1. Letting emotions run the show. Making decisions about something as important as your financial future can be scary. Anxiety producing. Even paralyzing at times. Making important decisions based on strong emotions (such as fear and anxiety) rather than facts and a well-thought-out investment strategy is a recipe for disaster. Seeking objective guidance and putting some distance between your impulse to make a change and the action you want to take can help you get some distance from your emotions.1
2. Valuing facts we “know” and “see” more than “abstract” facts. Information that seems abstract may seem less valid or valuable than information that relates to personal experience. This is true when we consider different types of investments, the state of the markets, and the economy’s health.2
3. Valuing the latest information most. In the investment world, the latest news often seems more valuable than old news (when in fact the reality is that the latest news could well be meaningless to a long-term investor). When the latest news is consistently good (or consistently bad), memories of previous market climate(s) may become too distant. If we are not careful, our minds may subconsciously dismiss the eventual emergence of the next big shift in the market.2
4. Being overconfident. The more experienced we are at investing, the more confidence we have about our investment choices. When the market is going up, and a clear majority of our investment choices work out well, this reinforces our confidence, sometimes to a point where we may start to feel we can do little wrong, thanks to the state of the market, our investing acumen, or both. This can be dangerous and lead to risky decision making.3
5. Falling victim to Herd mentality. You know how this goes: if everyone is doing something, they must be doing it for sound and logical reasons. The herd mentality is what leads many investors to buy high (and sell low). It can also promote panic selling. The advent of social media hasn’t helped with this idea. Above all, it encourages market timing, and when investors try to time the market, they frequently realize subpar returns.4
Sometimes, asking ourselves what our certainty is based on and reflecting about ourselves can be a helpful and informative step. Examining our preconceptions may help us as we invest.
Want to separate bias from important financial decisions? I can help you navigate complex financial decisions and enjoy financial peace of mind.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates.
1. CNBC.com, September 28, 2020
2. Forbes.com, March 26, 2020
3. Forbes.com, March 19, 2020
4. CNBC.com, June 26, 2020