Breaking Bad (Behavior): Inherent bias when investing

I know we usually cover real estate and mortgage-related content on this weekly marketing blog, but I wanted to share something that's super interesting outside of the world of real estate, although it definitely still applies.

A friend and client of mine, Brian Boyd of Boyd Wealth Management, is a financial planner for high net worth individuals. He recently wrote this piece for his audience, which covers behavioral finance and our tendencies to screw things up based on emotion and bias.

Enjoy this excerpt from his article and there a link to the full version at the end. Thank you, Brian!

-Norm  :-)

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Psychological and behavioral biases may cause investors to make decisions with their portfolio that have a negative impact on their long-term investment success.
 
Basically, human beings are often our own worst enemies when it comes to investing.
 
Understanding Behavioral Finance
 
Behavioral Finance is the study of psychological influences and biases that directly affect decisions around money. This phenomenon explains why markets often move erratically, based not on objective data but on the actions of participants who aren’t always acting rationally.
 
These influences can actually drive investors to make decisions that are contrary to their best interest.
 
Some common biases include:
 
Confirmation Bias – accepting information that confirms an already-held belief while ignoring information that contradicts it. 

Examples: searching out news reports that support your opinion that markets are set to go up/down. Or, if this candidate or that candidate wins the election, the economy will tank.
 
Loss Aversion - placing a greater weight on the concern for losses than the pleasure derived from market gains. 

Example: studies have shown that investors feel the effect of losses TWICE as much as they enjoy the satisfaction of gains.
 
Familiarity Bias - the tendency of investors to only buy what they know and are comfortable with, at the exclusion of other alternatives. 

Example: a US based investor may neglect quality international stocks in their portfolios. (By the way, this is also an issue with investors in Australia, Japan, Europe, and the UK.)
 
Anchoring Bias - becoming tied to a readily available reference point when making an investment decision. 

Example: judging your portfolio allocation and performance based on its most recent high-water mark.
 
Recency Bias - over-extrapolating the recent past or present into the future. 

Example: assuming a current run-up or downturn in stocks will persist forever.
 
These biases in human behavior are not likely to go away anytime soon. They’ve been ingrained in us since early humans survived by hunting and foraging for food, all-the-while mightily trying to avoid becoming food for something else!

-Brian Boyd, Boyd Wealth Management

To read the full article, click here.
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