Biases In Thinking And Decision Making
When I was in 3rd grade, I was over at my friend Dan Krantz’s house. We were having a great time until his mom made us Mac N’ Cheese. I took 1 bite and next thing you know I threw up all over the place. I was 9 years old, and have not had one bite of Mac N Cheese since. Let’s take a minute to analyze this statement as there are a few key things to be extrapolated and learned. Oh, and don’t worry this will turn into a finance blog I promise.
For starters, think of all the amazing meals I’ve missed out on through the years. My kids live on this stuff and love it (as do most people). I’ve been to many a restaurant with fancy upscale lobster mac n’ cheese and other variations. I sit there and stare as my friends gobble it up with enjoyment. Not me, instead I order the darn salad!
Next, why don’t I like it? Because of one bad experience over 30 years ago! Think how insane that sounds as I say it. Not only that it has basically 2 ingredients that most humans like, carbs and cheese! If you’ve met me, and seen my pizza prowess, you would understand my love for these items. Yet, I still get nauseous thinking about eating it, simply because of what it did to me 3 plus decades ago. It is insane to think the brain is that powerful of a thing it can hold onto something that happened when I was a kid, and literally affect my decision-making today.
Past Experiences Do Affect Current Decisions
I bring this up, not to get lambasted by all you mac n’ cheese enthusiasts. Rather, I make these two points as they are relevant to so many of us in our current investing behavior. Let me explain, shall I?
Today, many clients are getting nervous as investments are clearly down. It makes them uneasy and the thoughts running through their brain are counterproductive. I get, not many, but some questioning their risk tolerance and allocation due to a bad 6 months.
Now let’s play this out a bit so you can see the relevance to mac n’ cheese. Let’s say the markets do what everyone reading this knows they do and that they have always done since the dawn of time. Suppose they go down a bit more and for a little longer. Then they continue to grow over the rest of your lifetime to unimaginable heights. Hypothetically, is there any reason to suggest this won’t happen?
Imagine if you acted on this behavior and went super conservative. The issue becomes, like me with mac n’ cheese, you’ll likely never revert back and thus miss all the amazing things the market has to offer. All while your friends and peers laugh as they enjoy the countless benefits over the next bunch of decades.
Part two, of my analogy, is how past experiences shape current decisions. There is a huge movement, we’ve been on the forefront for a while, in the financial services industry called behavior finance. It essentially talks about all the biases we have as individuals and how it shapes our current decision-making. One of our toughest and most valuable jobs as financial guides is to help rid us of these biases, as they are not healthy. Instead, they are more fight or flight behaviors that are innately hardwired into our brains. I’ve written about this topic many a time, but now is a great time to revisit this stuff.
Here are a few biases to make my point:
Types of Biases in Thinking and Decision Making
This speaks to the fact we weigh things that happened recently more heavily than things that happened a while ago in our decision-making. For instance, you may have seen incredible growth in your investments over the past 10-15 years, yet one blip on the radio in today’s market and all those benefits go out the window. I hear things now like, “Andrew the markets may not go back up in my lifetime.” Now, these comments aren’t from a bunch of 98-year-olds either.
This suggests that we overweight our own decisions more than we should be. During times like these, I see it all the time. Many experts emerge as market guru’s these days. The reality is what information are they working with? I’d suggest that in almost no situation are these decisions founded on more research and analysis than what experts in the field are working with, including our own highly credentialed investment team.
This speaks to the fact that individuals overvalue an initial piece of information more than subsequent information. Again, I see this a lot during down markets. “Andrew, I read a few months ago inflation yada yada yada.” I believe markets are efficient and constantly pricing in new information. The question at hand is, are you? Or are you working with stale information from an article or news piece you saw months ago?
Mac N Cheese Bias–
This is a new name, I created today, for many other industry biases. Essentially, your current decision-making is based on a bad experience from your past. Do you know how many times a new client comes in and has their funds really conservative? I’ll ask why and they’ll go back to 08 or 99 markets and they’ll recite how bad that was. Rather, than focusing on everything that happened in between those years, and the myriad of benefits if they didn’t act on one bad experience? This one event in their past really can hinder current decision-making.
Eat The Mac N’ Cheese
Don’t be like me, eat the mac n’ cheese would ya! Hopefully, my point is clear that carrying around old baggage can be a serious detriment to your finances and your pallet. I recognize it is a really hard thing to do, and these are deep-rooted behaviors we have to change. That said, these are the times I find leaning on professionals to help guide you and look at things through an unbiased lens is critical to your long-term financial health. We take a lot of pride in being students of this at Diversified so lean on us we are happy to help.
Stay wealthy, healthy, and happy everyone.
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