Investing already involves risk, so how can we better manage our behavioural risks?
In this episode of 🧠Brain Hacks, Kate Campbell and Evan Lucas discuss some of the behavioural risks Dr Daniel Crosby highlights in his book, The Laws of Wealth, and how we can combat them.
Dimensions of behavioural risk (from Dr Daniel Crosby’s The Laws of Wealth)
- Ego → overconfidence, defensive when ideas are challenged, confirmation bias, illusion of control, false consensus
- Emotion → leads us to underrrate the possibility of bad things happening to us (optimism bias), to avoid even thinking about what might go wrong (ostrich effect) and to ignore the important role emotion plays in our decisions (empathy gap).
- Conservation → we like winning way much more than we like losing e.g. loss aversion, sunk cost fallacy, zero risk bias
- Information → this risk occurs when incomplete, flawed or misweighted data gives rise to decisions that are equally defective.Â
- Attention → Our attention can be hijacked by low-probibility-high-scariness things e.g. anchoring, availability bias, attention bias, home bias
