How to Overcome 3 Unconscious Biases That Can Keep Your Financial Goals Out of Reach
In a perfect world, every money decision we make would be totally rational.
We’d consider all of the facts. Then, we’d balance them with the risks to make the most logical choice available.1
That sounds simple.
Yet it doesn’t happen as much as it should in the real world.1, 2
That’s because many of us aren’t relying on logic and the facts to make financial decisions—and we probably don’t even realize it.2
Instead, we could be letting some tricky biases get in our way.2
When that happens, we tend to depend on impulse, emotion, and flawed reasoning––not the facts.
And that can make it incredibly challenging for even the smartest folks in the room to make sensible financial choices.2
So, what does it really take to make better decisions with our money?
It takes a little knowledge of the mental biases that can trip us up with finance.2
3 Hidden Biases Behind Poor Investing Moves
Any of us can experience one or more of these unconscious biases at some point in life. Learning how to quickly recognize them, can help us stay open to new information, helping to guide us to make well-informed decisions and find better financial opportunities.
1. The Halo Effect
With the Halo Effect, we under-or-over value some options, based on arbitrary factors that we find attractive. Simply put, we see a “halo” around certain options just because of how those options are presented and not based on any facts or actual due diligence.1
Investing Example: You have the opportunity to invest in Company A or Company B. Company A is run by an Ivy League graduate who wears a suit during the investment pitch. Company B is operated by a non-Ivy-Leaguer who doesn’t wear the suit when you meet him. So, you invest in Company A because it seems like a better investment, based on the “look” of it and not based on any facts about potential risks or payoffs.1
Sign: “They look more professional, so they’re probably more successful.”
The halo effect can be really strong around certain brands. If you’re wooed into an investment because of brand popularity, take that as a red flag of the halo effect—and make sure you’re not skipping the due diligence before making an investment decision.1
2. Fast Thinking
Under the influence of Fast Thinking, we’re primed to act NOW, without any checkpoints and as a reaction to taking in a lot of info pretty quickly. With that, our thinking speeds up and tends to cut corners, racing with thoughts of riches and making us feel like we have to make a choice—and sometimes a big one—ASAP.1
Investing Example: You’re in a high-pressure seminar with a fast-talking pitchman who’s highlighting a “golden” opportunity, and you have to act quickly to get in on it. Fast thinking can also take hold when you’re researching investment options in internet rabbit holes, flooded with info and few filters.1
Sign: “There’s not a lot of time left, so I better jump into this “great” investment in a BIG way right now!”
That need to rush is some classic Fast Thinking at play, and it’s not usually behind the best financial choices. Instead, it tends to mislead folks into making big moves quickly, before they’ve considered all or any downsides.1
3. Future v. Present Self
When we’re experiencing the Future v. Present Self bias, we think of ourselves as two different people, and we value our present self more. In other words, we tend to view our “future self” as someone else, and we don’t recognize that our “other” self doesn’t need the same things our “present self” does.1
So, we tend to make financial decisions that benefit our present self more than our future self, leaving us not as prepared as we’d like to be when the future ultimately becomes the present.1
Investing Example: You allot 2% of each paycheck, instead of 5%, to your retirement savings because you want more spending money day to day.1
Sign: “Who knows if I’ll live to be 90 or 95?! I’m here now, I’m going to treat myself now!” Trading off the future to “live better” now is a telltale sign of the Future v. Present Self bias. It makes us want the sure thing now, and it can mean we end up stealing from our future self simply because we don’t “know” them or take time to really consider ourselves in the future.1
How to Stop Making Bias-Driven Choices in Finance & Experience Better Results
These aren’t the only hidden biases that we can encounter in our financial lives. Unfortunately, there are many more, and they can subtly taint our perspective and reasoning abilities.2
That’s more likely to happen when we’re facing all-new decisions or the future seems particularly scary. We’re also susceptible to biases when we just don’t know a lot about the choices we have to make.2
The good news is that we don’t have to navigate all of this alone and it’s never too late to learn more and seek to make better money choices tomorrow. Whether you’re facing high-stakes financial decisions or you simply want to make better choices to stay on track for big-picture goals, touching base with a financial professional can help, especially when you’re routinely checking in. That’s how the sharpest investors typically fine-tune their outlook and choices for seeking better results.
Sources (as of 04/12/2024):
This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2024 Advisor Websites.
