You are Biased Whether You Like it or Not

“What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact.” – Warren Buffet

 

You shouldn’t listen to me, other bloggers, or even your own financial advisor only when determining your asset allocation, financial plan, stocks/bonds/ETFs, etc…you should listen to everyone!  Yes, that is right.  Listen to everyone, read as much as you can, then examine the evidence.  Finally, put that all together in a blender and then look inside yourself.  Your decisions should reflect all of those things when deciding how to proceed on your financial journey.

 

I’ve been there and done that.  I had a solid plan in place until I didn’t.  I’ve changed my plan based on someone else’s making sense to me, then realized it wasn’t working…costing me 10’s of thousands of dollars in “mistakes” (there really aren’t mistakes, just ‘tuition’ as I’ve learned over and over again).  The barometer I now use is less complicated, less stressful, and much easier to implement: values and quality of sleep.

 

Is your investment strategy lining up with your core values?  How well do you sleep at night?  Yes and great should be your answers.  You cannot deny your biases (see below); nor can you ignore the psychology behind your money decisions or direction.  Although these are not “technical” indicators of ‘the how and why’ that should govern your investing decisions, in my humble opinion they must be a huge consideration in guiding your money principles.  Your quality of life depends on it.

 

Biases

 

Everyone is subject to these:

 

  1. Confirmation Bias – seeking information or evidence that supports are current beliefs and excludes contradictory opinions
  2. Recency Bias – prioritizing information we have recently encountered
  3. Overconfidence Bias – we think we are smarter or know more than we actually do
  4. Availability Bias – the easier the information is to come by, the more likely that we will rely on it rather than seek out harder to find information

 

These biases permeate every aspect of your life, including your financial life.  The current evidence suggests that the MOST important things to become a successful investor (growing your net worth) is your behaviour when the market moves and your asset allocation and subsequent periodic re-balancing of that allocation.  Notice picking the correct securities is NOT the most important thing for success.  Neither is timing the market.  Neither is one asset class over the other.  You can read a thousand different ways that people have grown their wealth, especially in the personal finance blogosphere.  Those who are successful already know what they value, and use that in structuring their financial lives.

 

This leads back to my 2 questions – does your strategy line up with your values (certain market segments, philosophy, goals) and do you sleep well at night?  Personally (which i will go into more detail in a future post) I am a business owner, so I like to own things.  For example, real estate and blue chip dividend paying stocks are a big part of my investment strategy.  As an owner of things I understand, I sleep much better at night than if I purchased an arbitrary mutual fund for example.  Perfect example of confirmation and availability bias in my own life. 🙂  A reason that you shouldn’t listen to just me or any one individual when it comes to money advice!

 

What shapes your money decisions and investment philosophy?  Psychology? Values? Numbers? Evidence? Other people? Anything else?

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