Michelle and Bev · Bertram Financial
Inside the Mind:
Bias, Belief, & a Better Way to Make Financial Decisions
We are emotional creatures.
Everything we experience shapes our beliefs, behaviors––our reality.
But if personal bias is how we favor or judge decisions, then those judgements can be exploited if incorrect.
And during your next financial decision, they could unknowingly affect even the tiniest details.
Though personal bias is natural, developing an awareness of these complex thought patterns is an excellent way to foster a more comprehensive view of our finances.
The 5 biases listed below are some of the most common among us today, and offer amazing insight into the psychology of investment behavior.
What exactly derails us? How can we avoid it?
Here’s the truth…
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5 Behavioral Biases That Can Misguide Our Money Moves
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Behavioral Bias #1: Loss Aversion
Feeling the sting of a loss twice as intensely as the thrill of a win––that’s loss aversion at play. (And isn't it just like us to focus on the negative?) Though this behavior is one of the many ways our brain works to protect us, it can ultimately cause a habitual avoidance of risk and/or change.
Example: Refusing to sell and take a short-term loss, even though there may be a better options available to you.
Behavioral Bias #2: Confirmation Bias
Confirmation bias happens when we fail to questions. Knowing we don't know it all is uncomfortable so we seek familiar information that affirms what we already believe or already know. .
Example: When you tend only to accept information about investments you already think are true; this is confirmation bias. Mutual Funds are the best way to diversify...
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Behavioral Bias #3: Herd Mentality
The herd mentality can push us to follow the pack and do what everyone else is doing. Instinctively, we can assume the herd “knows best,” so we jump on the bandwagon without thinking twice.
Example: In the book (Don't) Follow the Herd, the author addresses the financial industry's goal to sell you something and the average person just going along with it as following the heard. The point he makes is that you have to understand the why behind what is being sold to you (their why, aka to make profits). To not follow the heard is to understand what you need.
Behavioral Bias #4: Familiarity
Familiarity bias is particularly limiting because it limits you to investments they you already know. This bias leads to under diversified (or highly correlated) portfolios and missed opportunities. .
Example: You believe mutual funds or target date funds are the only way and are closed or guarded against any other options. If is similar to confirmation bias. We could also call it status que bias - people are willing to stay with the familiar no matter how bad rather than make a change.
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Behavioral Bias #5: Anchoring
The anchoring bias can cause us to put more weight or value into the first set of information we come across when we’re making a decision. We “anchor” to that first piece of info, using it to evaluate current or future circumstances.
Example: I read once that annuities are bad... or my mom had an annuity and I don't like them because....
(Often in an example like this, the anchoring is based on half-truths or just part of the picture. There are multiple types of annuities, the information we are anchoring too may be only about one type.) Check out our What is an Annuity FAQ to learn more on this example.
“Logic can fly out the window when our biases and feelings replace the facts.”
FINANCIAL LESSON:
Ways to Outsmart Any Bias to Experience Better Financial Results
Have you experienced any of these biases firsthand?
Did any surprise you?
Whether or not these biases feel familiar, the truth is we aren’t perfect and we don’t make perfect choices.
Logic can fly out the window when our biases and feelings replace the facts.
Which can have us relying on faulty reasoning, muddled memories, or flawed intuition to make major financial decisions.6
So consider this: Instead of giving in––we adapt. And we can start simple, by recognizing our biases and being more aware of how our emotions play into our financial choices.
From there, we create a better framework for considering money moves.
And give ourselves a “process” to guide our path.
We can also ask questions to test our biases.
These steps can help keep our eyes on the big picture.
Sincerely,
Michelle and Bev
Bertram Financial
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Michelle and Bev
Bertram Financial
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Michelle and Bev
Bertram Financial
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Content prepared by Snappy Kraken.
This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment can guarantee a profit or protect against loss in periods of declining values.
The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.
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Michelle and Bev
Bertram Financial
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