A behavioural bias is the idea that our irrational, emotional impulses often drive our decisions, even in matters of personal finance. We all have different biases that influence our financial decisions, which can be costly if not identified and corrected personally or through the help of a financial adviser. In this blog, we’ll explore some of the most common behavioural biases when investing and developing your own investment strategy.
1. Anchoring Bias
Anchoring bias is the tendency to anchor our financial decisions to past experiences, even if they do not serve as a reasonable guide for future decision-making. For example, if a stock has been performing well for years, we may be more likely to invest in it even though it may no longer be a good value. To avoid this, it’s essential to do your research and not be swayed by past performance.
2. Confirmation Bias
Confirmation bias is the tendency to interpret data and information in a way that aligns with our existing beliefs or priorities. For example, if you strongly believe in a particular investment approach, you may only seek out sources that validate your beliefs. To combat this, it’s important to seek out a variety of views and get different perspectives on your decisions.
3. Overconfidence Bias
Overconfidence bias is the tendency to overestimate our abilities or knowledge in a particular area, leading us to take greater financial risks than we should. It’s crucial to remember that no single person has all the answers and that seeking out professional advice can give us a balanced understanding of our situation.
4. Sunk Cost Fallacy
Sunk cost fallacy occurs when you continue to invest in something due to the amount of time, money, or energy you have already put into it, rather than making decisions based on future costs or benefits. To avoid this bias, try to focus on the potential future value of your investment rather than the past.
5. Recency Bias
Recency bias is the tendency to give more weight to recent events, rather than considering the bigger picture. This can lead us to make irrational decisions based solely on recent headlines or market fluctuations. To avoid this blind spot, it is important to consider past events and make decisions based on long-term trends rather than just the most recent news.
Being aware of the personal biases above will help you make better financial decisions throughout your investment life and investment strategy. Sometimes your own personal biases can be hard to identify however you’re not alone and there are many qualified professionals who can guide you on your investment journey. We would encourage you to reach out to the Boutique Advisers team, who are experienced in helping people from all walks of life make sound investment decisions and build their wealth position over time.
Sean Hocking works with individuals and their families to provide peace of mind and clarity around their financial future. Having a roadmap in place which clearly articulates what’s important in the years to follow gives his clients the confidence to make clear and informed decisions throughout their financial life journey.