Everything You Need To Know

• We’re just highly evolved animals.
• We are a complex mix of behavioural biases. Biases work below the level of our consciousness; we are generally not aware of them.
   
  
  1. Overconfidence Bias
     
     Description: Overestimating one’s own ability to predict or control financial outcomes.
     
     Impact: Leads to taking excessive risks and underestimating potential losses.
      
     
  2. Loss Aversion
     
     Description: The tendency to prefer avoiding losses rather than acquiring equivalent gains.
     
     Impact: Causes investors to hold onto losing investments too long or sell winning investments too early.
      
     
  3. Herd Behaviour
     
     Description: Following the actions of a larger group, often irrationally.
     
     Impact: Can result in buying high during market bubbles and selling low during crashes.
      
     
  4. Confirmation Bias
     
     Description: Seeking out information that confirms existing beliefs and ignoring contradictory information.
     
     Impact: Leads to reinforcing poor financial decisions and ignoring warning signs.
      
     
  5. Anchoring Bias
     
     Description: Relying too heavily on the first or most recent piece of information encountered (the “anchor”).
     
     Impact: Can result in mispricing assets or making investment decisions based on irrelevant data points.
      
     
  6. Recency Bias
     
     Description: Giving undue weight to recent events and experiences over historical data.
     
     Impact: Leads to chasing recent performance and neglecting long-term trends.
      
     
  7. Availability Heuristic
     
     Description: Overestimating the likelihood of events based on their availability in memory.
     
     Impact: Causes irrational fears or expectations based on recent news or vivid anecdotes.
      
     
  8. Status Quo Bias
     
     Description: Preferring things to stay the same and avoiding change.
     
     Impact: Results in missed opportunities for better investments and reluctance to rebalance portfolios.
      
     
  9. Endowment Effect
     
     Description: Valuing owned assets more highly than those not owned.
     
     Impact: Leads to holding onto investments longer than justified and overvaluing personal possessions.
      
     
  10. Mental Accounting
      
      Description: Treating money differently depending on its source or intended use.
      
      Impact: Causes misallocation of funds and suboptimal financial decision-making.
• Emotions can be regulated, but never switched off.

Everything You Need To Do

• Have a plan, think long-term and set clear goals.
• Build frameworks for financial decision-making.
• Diversify and track markets.
• Educate ourselves and regulate media intake.

Bad financial behaviour comes from fear and an over-reliance on gut feeling. Good financial behaviour can be encouraged by education, particularly about how things really work and also a basic understanding of our natural biases.

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