When discussing investing, we often picture ourselves as logical beings, making decisions based on cold, hard facts rather than warm, fuzzy feelings. But let’s face it: even the most seasoned investors can sometimes let emotions sneak in and take the wheel, steering us towards financial fiascos.
Investing isn’t just a numbers game where the brainiac with the highest IQ reigns supreme. As Warren Buffet famously quipped, “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.”
“Speculation leads you the wrong way. It allows you to put your emotions first, whereas investment gets emotions out of the picture.” (John C. Bogle)
It’s tempting to believe we can control our emotions regarding money matters. However, being human means we’re susceptible to emotional biases that lurk silently beneath the surface, influencing our choices without us even realising it.
Know your foes
The first step in safeguarding your investment decisions is understanding these emotional biases. After all, how can you combat something you don’t even know exists? Let’s explore three common culprits: confirmation bias, familiarity bias, and loss aversion.
Confirmation bias
In today’s information overload era—thanks to social media! —we suffer from what some call “infobesity.” We digest facts and opinions, confirming our beliefs while ignoring anything challenging.
Do you think you might be guilty of confirmation bias? Consider these signs:
• Have you noticed more Jeeps on the road after buying one yourself?
• Do you only tune in to analysts who share your bullish (or bearish) outlook, dismissing contrary opinions?
Familiarity bias
Humans have a soft spot for the familiar, even when it comes to investing. We stick to what we know, shunning the benefits of diversification in favour of the tried and true.
Feeling the tug of familiarity bias? Take a look:
• Do you find yourself buying yet another rental property despite already being knee-deep in real estate?
• Do you prefer investing in companies you’ve heard of, even if it means missing out on opportunities abroad?
Loss aversion
Loss aversion is the fear of losing outweighing the joy of gaining—an all-too-human trait that can wreak havoc on investment decisions.
Are you worried you might be averse to losses? Ask yourself:
• Are you hesitant to jump on promising investment opportunities because of the potential risk?
• Have you held onto a losing investment, hoping it will bounce back, even when selling would make more financial sense?
We’re here to help
While banishing emotional biases entirely isn’t feasible (or even desirable!), we can take steps to minimise their impact on our financial decisions. Partnering with our team gives you the tools to recognise and address these biases before they sabotage your financial goals. We are your financial advisors and we’ve got your back!
Disclaimer – *The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
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