When we are emotional, we tend to become more biased, which often leads to not making balanced decisions and these can be harmful. We draw on a recent article from Allan Gray that focuses on behavioural biases in order to identify them when they occur and to help us mitigate them to ensure better rational decision making.
Behavioural scientists have identified numerous biases that can lead us to make poor decisions. These include:
Availability/attention bias – the tendency to rely on information that comes up frequently. Investors gravitate to investments they hear about frequently running the risk of missing good opportunities elsewhere.
Confirmation bias – relying on selective information that supports your beliefs. Investors avoid criticism or only cherry pick information that supports their ideas.
Anchoring – to rely heavily on one piece of information to reach a decision. If something has done well, investors tend to hang on to it at the expense of cashing in and not banking a profit.
Home bias – trusting the surroundings that are familiar to you and consequently, not venturing into other opportunities such as diversifying your portfolio.
Favourite long-shot bias – making an investment with the hope of high returns but forgetting that the chance of a high return is low.
In these times of constant negative news, it’s critical to have a well thought out financial plan with realistic goals and a solid investment strategy that can achieve your goals. Speak to one of our financial advisors to assist you.
Please click here.