Psychologists have long studied decision making and how the human mind works. In partnering with clients to assist in the journey of making smart financial decisions here are a few of the biases which can impede our ability to make balanced decisions and interpret information.
- Confirmation bias – a tendency to seek, interpret or recall information which confirms our pre-existing thoughts or ideas. With the sheer volume of financial ‘news’ produced it is easy to focus and only identify with the information that confirms our biases.
- Hindsight bias – overestimating the ability to have predicted an outcome even though we did not have a basis for predicting it in the first place. This can cloud future decision making and cause people to make a decision based on selective memory rather than the facts in front of them.
- Recency bias – potential to overvalue or place more significance on recent information when making a decision. This can come down to the fact people often recall recent information more vividly or can be inclined to overly focus on recent events. This is a known phenomenon in investment psychology where investors sometimes focus on recent past performance driving the emotions of greed (fear of missing out) or fear (what might happen in the next coming weeks/months).
- Bandwagon bias – a tendency to want to participate in something because others are participating. The crowd or herd effect where decision making is influenced by what other people are doing or saying instead of reason (sure to have had an effect on some speculative bubbles over time).
- Blind spot bias – not recognising our own potential for biases is a bias in itself!