Investor, Know Thyself: How Your Biases Can Affect Investment Decisions

This week, Craig Siminski, of CMS Retirement Income Planning, shares with us an article summarizing some common biases that can influence financial decisions:

Traditional economic models are based on the premise that people make rational decisions to maximize economic and financial benefits. In reality, most humans don’t make decisions like robots.

While logic does guide us, feelings and emotions — such as fear, excitement, and a desire to be part of the “in” crowd — are also at work.

In recent decades, another school of thought has emerged. This field — known as behavioral economics or behavioral finance — has identified unconscious cognitive biases that can influence even the most stoic investor. Understanding these biases may help you avoid questionable financial decisions.

Sound Familiar?

What follows is a brief summary of how some common biases can influence financial decision-making. Can you relate to any of these scenarios?

Anchoring refers to the tendency to become attached to something, even when it may not make sense. Examples include a home that becomes too much to care for or a piece of information that is believed to be true despite contradictory evidence.

In investing, it can refer to the tendency to hold an investment too long or rely too much on a certain piece of data or information.

Loss Aversion Bias describes the tendency to fear losses more than to celebrate gains.

For example, you may experience joy at the chance of becoming $5,000 richer, but the fear of losing $5,000 might provoke a far greater anxiety, causing you to…

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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 25 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.

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