We humans are complicated, irrational beings and our mindset and behaviors can have a massive impact on our financial outcomes.
Our brains are hardwired with psychological biases that can hurt us as investors, especially right now, when we’re experiencing an economic crisis and volatile markets.
Here are 3 of the mistakes and what you can do about them:
One: Action Bias. Humans are primed for action. It makes us feel in control, especially in uncertain times.
However, sometimes, immediate action is the wrong move, especially when it’s driven by emotional reactions or gut decisions.
Fight action bias by taking time to engage the rational part of your brain and getting advice before making a move.
Two: Recency Effect. We tend to remember recent events more clearly, so we give them more weight when making decisions than past or potential future events.
While market losses hurt, we can’t let them derail our goals or keep us on the sidelines.
Three: (Warren Buffett’s Favorite) Confirmation Bias: We love being right and hate being wrong.
So much so that our brain tricks us by being more receptive to information that confirms what we already believe and resistant to conflicting evidence.
Counteract this by getting an outside perspective and creating systems to make logical decisions. Buffett has someone to talk ideas with, and you’ve got me.
The truth is, we all have biases, including professionals.
But, by learning about how our brains work, we can leverage our behavior and create systems that help us remove bias and create better financial outcomes.
That's why understanding the behavioral side of money and investing is so important.
We’re here for you. We believe in you.
