ABCs of Behavioral Biases (A to F)
Four self-inflicted biases that knock a number of investors off-course are anchoring, blind spot, confirmation and familiarity bias.
Recency bias leads us to believe that this summer has been overloaded with more major events than in previous years, but the truth is we tend to say the same thing every summer.
We are not making light of this summer’s uncertainties. Inflation is real, and it needs to be managed. We also cannot rule out the possibility we will still see stagflation and/or a recession. Heightened levels of market volatility across stock and bond markets alike may have left you once again wondering whether this time is different. Wider worries prey on our minds as well, such as the war in Ukraine, totalitarian aggression in other hot spots around the world, ongoing discord closer to home and climate change.
But it is also important to remember that we are inherently biased to pay more attention to recent alarms than long-ago news. In the right context, this form of recency bias makes perfect sense. As we go about our lives, it is often best to prioritize our most immediate concerns, or else. No wonder we have gotten so good at it.
However, as an investor, if you overemphasize the news that looms the largest, you are far more likely to damage your investments than do them any favors. You will end up chasing hot trends, only to watch them combust or fizzle away. Or you will jump out during the downturns, without knowing when to jump back in.
How do we defend against recency bias? It can help to place current events in historical context. Do you remember what investors were worrying about a year, several years or several decades ago? If you experienced some or all of these events first-hand, you might recall how you felt at the time, before we had today’s hindsight to inform our next steps:
Above are just a few examples. They do not include the market’s endless stream of lesser alarms that are easy to dismiss in hindsight, but often generated as much real-time storm and fury as the more memorable events.
The point is there is always something going on. And even as global markets persist, we forget or rewrite our memories, until they are no longer available to inform our current resolve.
In the face of today’s challenges and tomorrow’s unknowns, we advise looking past recent trends and focusing instead on a handful of investment basics that have stood the test of time. They may seem unremarkable compared to the breaking news. But when has “buy low, sell high” or “a penny saved is a penny earned” become a bad idea once all the excitement is over?
In the next installment of this series, we will review some of these investment basics, and how they apply to you and your personal wealth.
This post was prepared and first distributed by Wendy J. Cook.
Four self-inflicted biases that knock a number of investors off-course are anchoring, blind spot, confirmation and familiarity bias.
Legendary economist Benjamin Graham once stated that ‘your own behavioral biases are often the greatest threat to your financial well-being.’
If you file tax returns separately AND are separated from your partner, colleges consider you a two-household family.
Take some time to map out how to pay for all four years before your student gets the bill for freshman year.