Investment decisions can be hard things to get right. Once you have managed to get your head around the financial jargon and how different products work, you must decide what level of risk you want to take and select a product from potentially hundreds of alternatives.
To help you realise what may or may not be influencing your investment decisions, without realising it, here is a quick guide to seven behavioural flaws to be aware of.
- Memory Bias
While you should undertake due diligence before any investment decision and keep a level head, it is admittedly difficult to not be swayed by recent information. As investors, we often give too much weight to recent experiences which may steer us away completely from what we believed beforehand. It is important to keep perspective and take a long-term view in this respect.
The adage ‘if it sounds too good to be true’ unfortunately applies here. It is very easy to be distracted by big headline figures and bold promises and this can easily drown out any scepticism you may have had previously. All investments have risk, no matter how stable they appear, so it is vital that you remain calm. Needlessly rushing and getting carried away could prove costly.
- Conservatism Bias
This flaw concerns when investors are too slow to react or update their thinking in light of new information. Born out of an obvious avoidance of loss, equally you could miss out on capital returns if you are too hesitant. Therefore, be prepared to take on some risk after you have done your research as this is the only way to make your investments work.
- Sample Size Neglect
Put simply, this is assuming too much from too little information. Investments, whatever type they are, are rarely as simply as they first seem so it pays to drill deeper. By widening the scope of information you can build a bigger picture and make more informed decisions. Not only could this enhance returns, it could help you avoid any nasty surprises awaiting you.
- Framing Bias
Similar to ‘sample size neglect’, it is important to identify how and who is presenting information to you before you make an investment. Do your own research and be prepared to look elsewhere for information. Fact checks can be easily done enough yourself and if you are finding difficulty with this, you can always consult with a financial adviser.
- Regret Avoidance
Sometimes with investing you must respond quickly and this can be as simple as admitting you’ve made a mistake. No one is immune to this and even the most successful professional investors can get it wrong. However, a bigger flaw can be purposefully ignoring the fact you have made a mistake and sticking with an investment that is not working. To stand against this, you should be willing to be confident enough to throw in the towel when the time calls for it.
- Financial Amnesia
As we have seen, we are constantly dealing with one form of bias over another. This is simply how human nature works and we can be very impressionable, especially when money is at play. However, it is crucial to keep in mind your past investment mistakes as well as your successes. You will only become a better investor if you learn from your mistakes and use those experiences in your future decisions.