If you recognise these in yourself, then you have slain one of the biggest barriers to sensible investing. Not only that but not realising they exist will lead you to making some awful judgements or indeed inaction and potentially costing you your whole financial stability – we have seen it time and time again sadly. You are more open to superstition and not fact, scams and pure gambling when the odds are not in your favour – they never are. We are here to help you realise these psychological traits are not helpful for prudent investing for example! I shall list them all and perhaps over a series elaborate on each!
- Loss Aversion
- Gamblers’ fallacy
- Attribution bias
- Endowment bias
- Bandwagon bias
- Recency bias
- Confirmation bias
- Blind-spot bias
For the investment manager, one of the best tools to engage is ‘patience’ in that sometimes, the lunatics can run the asylum for much longer than they should. However, recognising these human traits and that they are indeed applied to the markets can help secure the optimum outcomes for our clients – we are not perfect and no-one is but this helps us with our fundamental decisions too. So, here goes!
Loss aversion – this is the emotional fear of loss, which says we feel a loss up to five times more than the pleasure of a gain. Of course, none of us wants to lose on our decisions (also relationships, jobs, homes, interests…) but sometimes the best thing to do when say a share has fallen is to buy more. That’s not because of superstition but if analysis shows that this fundamental decision (even if the facts have deteriorated) is the right one. Many of our best investments have been hoovering-up from desperate sellers after an investment’s value has fallen and yes, often even then, the price can keep drifting till it finds a new ‘floor’ for recovery (sometimes yes, a sale at a loss is the right and best thing to do too). Don’t hold something ‘just because’ though it is only a paper loss till you crystallise a sale too. Remember too that there is an opportunity risk – would that money be better somewhere else anyway, rather than simply stagnating? We don’t believe in rigid stop losses (where you sell if say something has dropped 10% (maybe we would if the investment is owned by loads of buyers who have followed such chartist trends upwards, as then collectively they fulfil their own predictions
