Wilson Financial Services Inc.

(859) 824-9422

Investment Read Time: 3 min

Do Our Biases Affect Our Financial Choices?

Investors are routinely warned about allowing their emotions to influence their decisions. However, they are not often cautioned about their preconceptions and biases that may color their financial choices.


In a battle between the facts & biases, our biases may win. If we acknowledge this tendency, we may be able to avoid some unexamined choices when it comes to personal finance. It may actually "pay" to recognize blind spots and biases with investing. Here are some common examples of bias creeping into our financial lives.

Letting emotions run the show.

How many investment decisions do we make that have a predictable outcome? Hardly any. In retrospect, it is all too easy to prize the gain from a decision over the wisdom of the decision and to, therefore, believe that the findings with the best outcomes were the best decisions (not necessarily true). Put some distance between your impulse to make a change and the action you want to take to help get some perspective on how your emotions affect your investment decisions.1

Valuing facts we "know" & "see" more than "abstract" facts.

Information that seems abstract may seem less valid or valuable than information related to personal experience. This is true when we consider different types of investments, the state of the markets, and the economy's health.1

Valuing the latest information most.

The latest news is often more valuable than old news in the investment world. But when the latest news is consistently good (or consistently bad), memories of previous market climate(s) may become too distant. If we are not careful, our minds may subconsciously dismiss the eventual emergence of the next market cycle.1

Being overconfident.

The more experienced we are at investing, the more confidence we have about our investment choices. When the market is going up, and a clear majority of our investment choices work out well, this reinforces our confidence, sometimes to a point where we may start to feel we can do little wrong, thanks to the state of the market, our investing acumen, or both. This can be dangerous.2

The herd mentality.

You know how this goes: if everyone is doing something, they must be doing it for sound and logical reasons. The herd mentality leads some investors to buy high (and sell low). It can also promote panic selling. The advent of social media hasn't helped with this idea. Above all, it encourages market timing, and when investors try to time the market, it can influence their overall performance.3

Sometimes, asking ourselves what our certainty is based on and reflecting on ourselves can be helpful and informative. Examining our preconceptions may help us as we invest.

1. Investopedia.com, 2022
2. Investopedia.com, 2021
3. WebMD.com, 2022

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Share |
 

Related Content

Acres of Diamonds

Acres of Diamonds

In life it often happens that the answers to our most pressing questions are right in our own backyards.

Millennial Money Myths: Buying a Car is Better Than Leasing

Millennial Money Myths: Buying a Car is Better Than Leasing

During difficult economic times, it is even more critical to be smart about where you spend your money. And it is essential to do your homework so...

The 12 Steps to Living Confidently: Retire With Confidence

The 12 Steps to Living Confidently: Retire With Confidence

There are good ways to retire and bad ways to retire. Retire the right way by better understanding Social Security.

 

Have A Question About This Topic?







Thank you! Oops!

Tax-Advantaged Health Care Planning for Retirement

Heading into retirement with confidence is easier if your planning includes steps to minimize taxes, especially as it relates to health care planning.

It’s Time to Have a Talk with Your Parents

One of the strangest developments in the ever-evolving child-parent relationship is reaching the point when an adult child starts dispensing advice to his or her parents. It’s a profound, but natural turning point in the relationship.

Organizing Your Finances

Spark joy and become more confident by giving your finances the home organization treatment.

View all articles

Home Mortgage Deduction

Use this calculator to assess the potential benefits of a home mortgage deduction.

Should I Pay Off Debt or Invest?

This calculator will help determine whether you should invest funds or pay down debt.

Should I Buy or Lease an Auto?

This calculator compares the financial impact of leasing versus buying an automobile.

View all calculators

Your Cash Flow Statement

A presentation about managing money: using it, saving it, and even getting credit.

An Inside Look at Retirement Living

A number of questions and concerns need to be addressed to help you better prepare for retirement living.

Principles of Preserving Wealth

How federal estate taxes work, plus estate management documents and tactics.

View all presentations

Video: The Independence of Financial and Emotional

Greater financial and emotional confidence brings greater independence. Isn’t that what it’s all about?

Dreaming Up an Active Retirement

When you retire, how will you treat your next chapter?

Are Alternative Investments Right for You?

With alternative investments, it’s critical to sort through the complexity.

View all videos