Making sound financial decisions should not be done by chance; they should be planned, researched, and managed by choice. For investors currently in the retirement planning stage, any decisions based on fear simply won’t work. By looking at the study of behavioral finance biases, also known as socionomics, your nest egg can potentially grow well into your golden years and beyond.
Have an honest discussion about your behavioral biases with a financial advisory firm in Norman, OK, today!
What is Behavioral Finance Bias?
With awareness and understanding of your financial behavior, you can begin to apply financial discipline and make decisions free from errors. Because bias distorts thinking, it can sway the decisions and judgments, and when it comes to your money, this can be detrimental. These tendencies can be easy to see in yourself and others; however, it’s not so simple for some.
Behavioral finance biases are unconscious beliefs that influence your decisions related to money, which include:
- Overconfidence bias
- Loss aversion
- Anchoring bias
- Regret aversion bias
- Limited attention span
- Chasing trends
- Herd mentality bias
If you can relate to any of these behaviors, work with an investment manager who works closely with you to help you avoid common financial mistakes.
Overconfidence Bias
If you see yourself as better than you are, you are experiencing overconfidence bias, which is common among investors. This often leads to mismanagement of risk. For example, overconfidence in investing can make you believe that you can accurately time the market. As you may be aware, timing the unpredictable market is like trying to predict the future – it’s not possible.
If you are a DIY investor, the reality is you are trading against institutional investors, computers, and big data around the world with more experience than you. To step out of this mindset, it can pay to trade less and invest more. Discuss with your advisor mirroring indexes, taking advantage of dividends, and increasing your time frame to build more wealth over time.
Bottom line: resist the thought that your intuition and information are better than others in the market.
Loss Aversion
By over-seeking gains and avoiding losses you may be experiencing loss aversion. Since people have a tendency to be more sensitive to losses than comparable gains, this is why you need professional investing support. This is also essentially why people tend to save versus invest.
If you aren’t willing to take the risk, you won’t profit from it. It helps to avoid getting emotionally attached to your investments, and know that risk is required in the investment game. If you’re still held up on high risk options, talk with your financial advisor about assets that generally perform well.
Anchoring Bias
Valuing a piece of information too highly to make subsequent judgments can influence decisions regarding securities, such as when to buy or sell investments. Since many investment decisions require many complex judgments, this can be problematic. Being open-minded to learning about what will best support your retirement accounts will go a long way in the investment game.
People who have to make a quick decision will oftentimes revert to anchoring bias. If you feel pressured, delay your decision and take the time needed to do your research. Stay open to new information even if it doesn’t align with your initial beliefs.
Bottom line: don’t rely on emotions; rely on metrics, and sound investment advice and management.
Regret Aversion Bias
If you refuse to make personal finance decisions because of fear that your decisions will be wrong (leading to feelings of regret), you may be suffering from regret aversion bias. This can be harmful in two ways:
- You can make a wrong decision, referred to as an error of commission, since action has been taken.
- If you miss out on an opportunity by not making any decision, this is known as an error of omission, due to the lack of action.
Psychologically speaking, the commission error has a higher chance of inducing regret than omission, because regret is usually associated with a responsibility for an action taken. Therefore, no action tends to be the default response of investors.
Limited Attention Span Bias
Because people operate from a “bounded rationality,” they tend to make decisions based on their accumulated knowledge, which is most often limited. Instead of making the most efficient decision, they make decisions based on what is satisfactory. Your attention span plays a huge part in this.
If the media has an impact on your trading activities, you may have limited attention span bias. If this sounds familiar, learn to evaluate stocks that are well-known and “out of the box” to reveal lucrative trades that you would have otherwise not found. You can use the media as one data point among many, but your greatest way to save for retirement is by working with TRAC Advisor Group Inc., a full-service, fee-based financial advisory firm in Norman, OK.
Chasing Trends
Have you ever chased a financial trend in the hopes of a payout? If you have, you are like the majority of investors who look back on past performance to indicate future performance. People have a knack for detecting patterns, and when they spot them, they believe them. In this case, it’s key to remember that the market is far more random than you may want to admit.
If you find a trend, the market has more than likely identified and showcased it before you. Don’t run the risk of buying at highs. Instead, you can consider buying when investors are fearful and selling when they are confident.
Following the herd doesn’t usually produce large-scale gains.
Herd Mentality Bias
Like a herd of sheep, you don’t always want to follow the crowd. Herd behavior happens when you follow the majority versus making your own data-supported financial decisions. If all your investor connections are investing in an extremely risky stock, for example, you may jump on that bandwagon even if it’s too risky.
As a general rule of thumb, be cautious of what’s being promoted, stocks being touted, and evaluate stocks before investing in them.
Avoid Behavioral Finance Bias
You can avoid these behavioral finance biases by adopting trading rules. You may want to:
- Sell if a stock drops by a percentage
- Not buying a stock after it rises a percentage
- Not sell a position until a specific time has elapsed
- Hire the right financial advisor that fits your needs
By working with TRAC Advisor Group Inc. you will benefit by:
- Working with a fiduciary advisor who is required to work in your best interests-always
- Upfront and direct communication: we don’t sugarcoat hard conversations
- Having a one-stop shop for your financial needs
- Enhancing all areas of your financial well-being since we partner with many financial professionals
- Receiving risk management to protect your assets
Read: What is Behavioral Finance and How Does It Affect Our Financial Decisions?
TRAC Advisor Group Inc. is a full-service, fee-based financial advisory firm in Norman, OK. We offer independent investment advice and help people withstand any type of market volatility with confidence.
As an independent investment advisor, we can offer alternative investments like numismatics and precious metals to diversify and hedge against uncertain times. With a straightforward and direct planning style, you can trust that we’ll keep you on track towards your financial goals.
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