Humans are complicated, irrational beings and we have learned that our mindset and behaviors can have a massive impact on our financial outcomes.
Our brains are hardwired with psychological biases that can hurt us as investors, especially right now, when we are experiencing an economic crisis and volatile markets.
Here are 3 of the biggies and what you can do about them:
One: Action Bias. Humans are primed for action. It makes us feel in control, especially in uncertain times.
However, sometimes, immediate action is the wrong move, especially when it’s driven by emotional reactions or gut decisions.
Fight action bias by taking time to engage the rational part of your brain and getting advice before making a move.
Two: Recency Effect. We tend to remember recent events more clearly, so we give them more weight when making decisions than past or potential future events.
While market losses hurt, we can’t let them derail our goals or keep us on the sidelines.
If you are feeling burned by the correction, reach out so I can help put things into perspective.
Three: Warren Buffett’s Favorite: Confirmation Bias: We love being right and hate being wrong.
So much so that our brain tricks us by being more receptive to information that confirms what we already believe and resistant to conflicting evidence.
Counteract this by getting an outside perspective and creating systems to make logical decisions. Buffett has Charlie Munger to talk ideas with, and you’ve got me.
The truth is, we all have biases, even professionals.
But, by learning about how our brains work, we can leverage our behavior and create systems that help us remove bias and create better financial outcomes.
|Author: Ivanhoe Sánchez
Founder & CEO
Outright Financial Strategies