We all have biases. Some folks have more than others. Some are more aware and some are not reflective at all about their biases. Yet, they still exist whether we acknowledge them or not. Why is this issue worth discussing? Biases can cause some very bad responses to how we manage and invest our money and how we live our lives. It's worth exploring this issue in detail as we look at YOU.
Confirmation bias is something that affects us all. The question is how much. We continue to seek out people, information, and communities that confirm our current belief system. It is kind of hard wired into our DNA, but it can really hurt us as we push aside new information just so we can hold on to what we "know." Let's remind ourselves to be open to seeing other viewpoints. There is always more to learn.
Political bias is where one is stuck on one political side and cannot understand how anyone could see it differently. This is a cousin to confirmation bias, but it is just as dangerous. This can easily keep us stuck in a bubble and it can be very hard to get out the longer we "live" there. Let's focus on being open to other peoples political views and remind ourselves that our current viewpoint might be slanted.
Optimistic bias is another bias. This is where the individual sees the many pluses ahead while ignoring or minimizing the possible pitfalls. Pessimistic bias is the other side of that coin. The key is to know thyself and then you can make sure that the things you minimize are brought front and center when making big decisions with your money. If you are not sure which way you fall, ask a loved one. They know!
Similarity bias kicks in for many of us as we attach ourselves to what is similar to us at that time in our life. It is very easy to fall under the spell of this bias as it also connects with confirmation bias. Our sense of safety and familiarity draws in many, many things as we live our life and manage our money to include our investments. Be aware of this bias and challenge yourself when you are "playing it safe."
Recency bias is a big one. We tend to run with what has just happened, expecting it to keep happening for the foreseeable future. This can really hurt folks who see the stock market going down, down and down some more. They start to think it is going to collapse and so they freak out and sell when they should have just gone for a walk and not let this bias lock in a loss. Recency bias can hurt!
Survivorship bias is a big one to be aware of when it comes to marketing and how we invest our money. Almost all of the research you see comparing active management mutual funds to passively managed index funds does not account for all of the "dead" mutual funds and their bad performance. If those crappy funds were accounted for, we would see just how great passively managed index funds perform.
Invisibility bias kicks in when we are oblivious to what is out there and we simply don't know about it. For example, research has shown for many decades that investing in low fee index funds and holding tight through good times and bad is by far the best way of investing vs. alternative options. Of course, this only means something to you if you understand what a low fee index fund is and how to invest in one.
Stereotyping bias can be deadly. This is when we stereotype groups of people or circumstances in ways that simplify it in our minds, but has no factual evidence behind it. Examples might have us thinking men are good investors and woman are bad or rich people invest, but the working stiffs don't. It is critical that we break the shackles of stereotyping so the truth can shine through. We are all unique!
The simplicity bias can have negative consequences on how we learn and manage our money. There is always more depth to subjects if we stay curious on the matter. Some folks might say investing is gambling and it is as simple as that. Sadly, those folks have chosen not to dig into the subject to better understand how those two things are very different. The subject is always more complex as you learn more.
In-group bias is another close cousin to confirmation bias. This happens when we stick with our close groups and allow group think to dominate our thinking instead of being willing to think for ourselves, even if that runs counter to our close group of family, friends, social media "friends," co-workers, etc. It is important to step back from the group and think for yourself. It could change the course of your life!
Selection bias is another bias. Once something is on our radar, we see more of it. It could be a type of car, clothing, electronics, or bitcoin for example. Here is where it can help you. Once you are introduced to index funds, you start to look for them in your retirement account or at Vanguard.com when deciding on an investment. Your radar could attract something that will help you!
Hindsight bias can really screw with our mind. After the fact, our brain says of course it occurred and you saw it before it happened, but you didn't. It just seems so obvious after the fact that your brain now thinks it was obvious before the event. This can happen when it comes to investing, as we "saw it coming." The truth is we live in a random universe and what is obvious only hits us after the fact.
Anchoring bias can really hurt us as we hold onto the first bit of information we have on a subject, whether it is good or bad, right or wrong. For example, your Uncle Joe told you the smart way to invest is to buy a whole life insurance policy. You are anchored to this idea, but that does not make it correct. It is actually incorrect and a very bad way to invest your money. Challenge some of those past experiences.
Fading affect bias can really mess with our memory. Our memories have a tendency to capture the "good old days" while forgetting or lessening the not so good days. This probably helped us as a species, but it can hurt you if you end up forgetting some negative events and what behaviors led to them. It is not good enough to know your history. Double check it and then check it again!
To conclude, our biases have a profound affect on how we live our lives and deal with our money. It is important to step back and really be honest with ourselves as we explore our biases (sitting down with a reflective friend can help). By understanding YOU and managing those biases as best you can, you can put yourself in a better place going forward. Harness those biases!
