We all have hidden biases that can subconsciously influence our financial decisions. Some are emotional and deep-seated attitudes formed in childhood while others are cognitive, but both can be altered through behavioural “nudges”.

The first step to beating these biases, and so mitigating their influence on your investment returns, is to acknowledge that they exist.

Keep reading for a closer look at some of the common emotional and cognitive biases you might be guilty of, and how advice can help you lessen their impact.

Cognitive biases are subjective decisions based on flawed reasoning or generalisations

You likely have pre-conceived ideas about investing, even if you don’t realise it.

Some of these ideas will contain elements of truth, while others might be based on generalisations, hearsay, or rules of thumb. Some are likely completely false and liable to lead you to poor decision-making. These are cognitive biases.

Here are three to look out for:

1. Confirmation Bias

Confirmation bias is the tendency to seek out only information that supports our already-held beliefs.

It’s the reason why you likely buy the newspaper that best aligns with your political outlook. The news you receive confirms what you already know, reaffirming your position.

This approach, though, can cause you to avoid other views or even ignore ideas that challenge those you currently hold.

The bias narrows your field of opportunity and could see you miss out on potential returns. Try to remain open to new information and acknowledge when cracks appear in firmly held beliefs. They might indicate that a change of viewpoint is required.

2. Herd-mentality bias

If a stock, sector, or region gains sudden traction, it can be easy to think that jumping on the bandwagon will lead to instant investment success. After all, that many people couldn’t be wrong, could they?

Herding, or “trend-chasing bias”, can be tempting. There’s reassuring safety in numbers and also the fear of missing out (“FOMO”) to consider.

Yet your investment strategy is individual to you. It’s carefully calibrated to your long-term investment goals and risk profile. So, just because a certain stock is right for one person – or even a herd of people – it won’t necessarily be right for you.

3. Oversimplification bias

It’s natural to want to simplify complex ideas. Breaking down complicated tasks or processes can make them easier to understand. Just be wary of oversimplifying.

At Boolers, we have decades of combined experience in investment markets. We use this acquired knowledge to conduct regular monitoring, ensuring that your portfolio always aligns with your risk profile and that it’s reactive to global and local challenges.

Oversimplifying this complex process can lead to poor decisions. Take the time to thoroughly understand the data available to you, and always speak to the experts.

Emotional biases are based on personal feelings or deep-seated attitudes to money and risk

Emotional biases are likely to be based on your feelings, rather than generalised market “rules” or data-based reasoning.

Our attitudes to money and financial risk are often formed during childhood. They’ll be based on many factors including our parents’ attitudes to money and our household’s wealth growing up.

Emotional biases can be deeply ingrained and very personal. While they might help you to make the right decision for you, they can also be damaging in some situations.

Here are three to consider:

1. Loss-aversion bias

As human beings, we tend to feel the sting of a loss more keenly than the joy of a gain. This can lead to loss-aversion bias.

You might find yourself strategizing to avoid painful losses, rather than to realise quickly forgotten gains. Maybe you’re holding on to poorly performing stock, simply to postpone the realisation of a loss? Remember that you might be missing out on better opportunities elsewhere.

2. Endowment bias

Holding onto poorly performing shares can be a symptom of loss-aversion bias, but it might also be down to the endowment effect.

This sees investors attach greater importance, and in turn value, to things they already own. It’s an overvaluation that generally comes from an emotional connection or a sense of ownership rather than data, which is why it falls firmly into the emotional bias category.

It can be difficult to let go of the things we own but remaining unemotional in investing is vital. This might mean staying patient when markets fall or acknowledging a subconscious bias and selling off poorly performing stock.

3. Home bias

You might find yourself investing most heavily in domestic markets. This is understandable. The companies are familiar to you, after all, and there is comfort in familiarity.

But diversification is an important part of any risk-managed portfolio. Spreading investment risk over asset classes, sectors, and geographical regions protects you from losses in a specific area. Concentrating too heavily on home shares might also mean you’re missing out on better opportunities elsewhere.

Try to embrace diversification by researching areas you are unfamiliar with, and then speak to us.

Get in touch

As human beings, we all have in-built biases and these can affect experienced and novice investors alike. If you’d like to discuss how your biases might be affecting your potential returns, or you have any other questions about your long-term financial plans, get in touch. Contact us now to see how our team of dedicated financial professionals can help you.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.