6 biases that impact investors (and how to manage them) [🧠 Brain Hacks]

We all have biases that impact how we make decisions and view the world.

As investors, when we understand some of the common biases that impact our decisions and those of experts, we can improve the way we spend and invest our money and ask better questions.

In today’s episode, Kate Campbell and Evan Lucas discuss six key biases that impact investors and how we might better manage them.

What is a bias?

To cause to feel or show inclination or prejudice for or against someone or something (Oxford).

A bias is a tendency, inclination, or prejudice toward or against something or someone. Some biases are positive and helpful—like choosing to only eat foods that are considered healthy or staying away from someone who has knowingly caused harm. But biases are often based on stereotypes, rather than actual knowledge of an individual or circumstance. Whether positive or negative, such cognitive shortcuts can result in prejudgments that lead to rash decisions or discriminatory practices. (From PsychologyToday)

Why is it important to understand our own biases and those of others as investors?

• They impact the financial decisions we make (or don’t make)
• They impact the advice people give us
• They change the way we consume information
• They change the information that experts provide

The six biases we discuss:

• 1) Affinity bias: Our bias towards ‘someone like me’, for example, in looks, gender, behaviour or background
• 2) Halo effect: When we see one great thing about a person and therefore think everything is good about them – fund managers/TV
• 3) Horns effect: The opposite of the halo effect — when we see one bad thing about a person, and it affects our opinions of their other attributes – judging a book by its cover!
• 4) Confirmation bias: The tendency to seek information that confirms our pre-existing beliefs or assumptions
• 5) Groupthink: The tendency to try and ‘fit in’ with a group by agreeing with their thoughts or positions and not expressing our own caused by under-confidence and a desire to ‘belong’.
• 6) Self-confidence (attribution) bias: the tendency to be overconfident about our knowledge or power to control a situation and be unrealistically optimistic about outcomes.