“There are over 200 different biases that can negatively impact the way you manage money,” said Daniel Crosby, behavioural scientist and author of ‘The Behavioral Investor’ at Cafemutual Confluence Investment Marathon 2021 (CCIM21).
Daniel generously distilled these and shared four primary behavioural mistakes that investors can make.
Bias #1 - Ego/Overconfidence
What does this bias mean?
Overconfidence is typically more predominant in male investors and takes multiple forms – many investors believe they are luckier in life and markets. Another set of investors believe they are better and smarter than others.
How to tackle this bias?
Investors can ask relevant questions before making any decisions. For example, asking ‘What would be the cause of me not reaching my financial goal?’ may reveal answers like ‘there is too much risk involved’, ‘the portfolio is not well-diversified’. This approach is known as the ‘pre-mortem strategy’ and helps in taking protective measures.
Bias #2 - Conservatism
What does this bias mean?
Humans get two and a half times more upset about losses than being happy about making similar gains. They tend to make poor money decisions when stressed or in a hurry. Also, doing familiar things gives more comfort. This is why certain investors typically shy away from exploring newer avenues.
How to tackle this bias?
Procrastinating and taking time to decide helps in making thorough and well-vetted choices.
Bias #3 - Attention
What does this bias mean?
Investors typically tend to fear things that are loud even though they might not actually be problematic. For instance, many fear shark attacks than taking selfies. However, statistics show people are more likely to die taking a selfie than from shark attacks.
How to tackle this bias?
Investors should look at probability/likelihood of an event taking place. Understanding probabilities helps make decisions without fear.
Bias #4 - Emotion
What does this bias mean?
This is where feelings override thoughts leading to emotionally poor decisions. Here’s an example, boating which could get dangerous is not perceived by many to be unsafe as it is enjoyable.
How to tackle this bias?
Investors should not make decisions when they experience any emotion, positive or negative intensely. Also, research shows, people speaking multiple languages make better financial decisions while thinking in their second language. Thinking in the second language requires slowing down and being more deliberative. Another study found people who look at pictures of their children before making a financial decision made better decisions as they focused on doing the right thing for someone they cared for.
Additionally, Daniel also shared three simple ways to manage behavioural risk better.
#1 - Consistency
Decisions made under financial stress may not be the best as financial stress reduces IQ by 13%. Rules or processes almost always beat people. A study found 94% of the time, simple rules beat or match human discretion/decision making. Investors should set their rules and not deviate from them.
#2 - Clarity
Investors should find those two or three parameters that matter the most to them instead of complicating things with multiple economic data points.
#3 - Courageousness
Investors should be courageous and exercise patience while investing. The more patient an investor is, the better is their performance.
This was Daniel’s session in brief. Watch this video for the entire session.
