Avoiding Biased Decision Making
When you hear something repeated enough times, doubts may start to slip away, and eventually it’s accepted as a fact. Believing the things that are imbedded in our psyche because we’ve heard them before is known as an “availability bias.”1
This may partially explain why blue-chip stocks are popular, as more investors tend to be interested in known entities they have heard about hundreds of times before. Of course, it’s important to ensure you can trust the source from which you receive information, investment or otherwise.
Identifying a wide range of investor biases is part of the research emanating from the growing field of behavioral finance. These insights are designed to help each of us understand why we make the decisions we do, particularly when we behave irrationally despite having reliable information in hand to make a rational choice. Behavioral finance delves into how we process information using flawed filters of emotion, memory and even our personal disposition to bias our decisions.2
Availability bias is just one of many factors that can impact investor decisions. Another is “recency bias,” an inclination to use our recent experience as a foundation for predicting what will happen. For example, even though we intellectually understand that securities prices rise and fall in market cycles, sometimes we get so caught up in the fact that a stock “always delivers” that we’re surprised when it takes a downturn.3
“Familiarity bias” is when we stick with what we know and avoid what we don’t. In life, that may simply lead to boredom, but when investing, it may have more significant implications.4 It’s like saying we already possess all the knowledge we’ll ever need.
Bias can even pertain to when retirees decide to begin drawing Social Security benefits. The trend is to start before full retirement age. Some people may need to supplement their income at that time, but others instinctively believe that if they don’t start taking benefits early, they’re losing money (“loss-aversion bias”).5
The truth is, once you begin taking benefits, you “lock in” to that level permanently. If you begin drawing benefits at age 62, you’ll receive 25 percent less each month than your full benefit at age 66.6
As a financial advisor, we work to establish trust with our clients. It’s important to consider any investment within the context of your own goals, risk tolerance, investment timeline and the composition of your overall portfolio. We will only provide investment advisory services after we have assessed your financial situation. If you’re interested in a comprehensive review of this nature, we’d be happy to schedule a time to meet with you.
Our firm assists retirees and pre-retirees in the creation of retirement strategies utilizing investment and insurance products. Advisory services offered through B.O.S.S. Retirement Advisors, a Registered Investment Advisory firm.. Insurance products and services offered through B.O.S.S. Retirement Solutions. To see a list of services please visit us at bossretirement.com/services.
This content is provided for informational purposes only. It is provided by third parties and has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation.We are not affiliated with any government agency including the Social Security Administration.
1 Kare Anderson. Forbes. Dec. 8, 2016. “Why Your First Instincts Can Hamper Your Capacity To Act Wisely And Innovate.” http://www.forbes.com/sites/kareanderson/2016/12/08/why-your-first-instincts-can-hamper-your-capacity-to-act-wisely-and-innovate/#414250f24f19. Accessed Dec. 30, 2016.
2 H. Kent Baker and Victor Ricciardi. European Financial Review. Feb. 28, 2014. “How Biases Affect Investor Behaviour.” http://www.europeanfinancialreview.com/?p=512. Accessed Dec. 30, 2016.
3 Charles Schwab. Aug. 12, 2016. “Is Recency Bias Influencing Your Investing Decisions?” http://www.schwab.com/insights/personal-finance/is-recency-bias-influencing-your-investing-decisions. Accessed Dec. 30, 2016.
4 Laura Tanner. Nerd Wallet. Sept. 15, 2015. “Understand Your Familiarity Bias to Be a Better Investor.” https://www.nerdwallet.com/blog/investing/understand-familiarity-bias-investor/. Accessed Dec. 30, 2016.
5 Michelle Zhou. Bank Investment Consultant. Dec. 27, 2016. “How to mitigate behavioral biases in retirement planning.” http://www.bankinvestmentconsultant.com/news/how-to-mitigate-behavioral-biases-in-retirement-planning. Accessed Dec. 30, 2016.
6 Doug Walker. Social Security Administration. May 12, 2015. “The Best Age for You to Retire.” http://blog.ssa.gov/the-best-age-for-you-to-retire/. Accessed Dec. 30, 2016.
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