We are a product of our experiences; our upbringing, our education, our peer groups, the news channels we view and the papers we read.
Studies have shown that, unfortunately, when it comes to interpreting information and making an objective sense of reality, human brains are hard-wired to make all kinds of mental mistakes that can impact our ability to make more rational judgements.
According to Jeff Desjardins in his capacity as Editor-in-Chief of Visual Capitalists, he states that in total, there are 180+ cognitive biases that mess with how we process data, think critically and perceive reality. This can adversely affect our well-being.
There is no simple way to get around these basic human instincts, but one thing that we can do is understand the specific mistakes we make and why.
In this blog, I want to focus on the two most common biases which I see adversely affecting people in relation to my role as a financial planner.
Confirmation Bias
This is very common. We encourage people to plan for the future, not just pile in head long and invest, ending up with an eclectic mix of plans and policies. Yet we often hear “it was interesting, but we only want something straight forward”.
Basically, they can’t be bothered to plan, sometimes they are scared to plan but more often than not, it is because they don’t want to pay for something that their friends and family don’t do.
You see, as human beings, we look for ways to justify our existing beliefs. We are primed to see and agree with ideas that fit our pre-conceptions and to ignore and dismiss information that conflicts with them.
I like what Richard Feynman states “the first principle is that you must not fool yourself… and you are the easiest person to fool”.
Planning is for everyone, not just the wealthy!
Negativity Bias
People allow negative experiences to disproportionately influence their thinking.
It may be that a potential client had a bad experience with a particular investment, many years ago, leading them to not want to invest ever again. “Investors feel the pain more than the gain” is a statement often attributed to creating biases.
I like what the ‘School of Thought’ say… “we are primed for survival and our aversion to pain can distort our judgement”.
Should losing out on one share, way back in your life, mean that you should punish yourself and never benefit from the magic of compounding returns in the future?
When it comes to money, many people have what is known in Buddhist terms as ‘monkey mind’. They have a lot of chatter in their head, but they keep feeding the monkey chatter with indecision or biases which ends up making them even more anxious.
They key is to stop the monkeys chattering!
Have a look at this video to understand how you can better control your future financial well-being.
