Making Best Use of Your Behavioral Biases:
How To Trick Yourself (Part 2)
Don’t Look Now
We’ve also long known how susceptible investors are to FOMO (fear of missing out), loss aversion, recency, and a bevy of other behavioral biases that trick us into chasing breaking news, rather than maintaining a more sustainable long-term perspective.
Reactionary trading can cost you. For example, an article in Canada’s The Globe and Mail, “Check in, freak out,” reported:
“A study conducted by U.S. robo-adviser SigFig found that its investors who checked in on their portfolios every day earned 0.2 per cent less each year in return than the average. Twice-a-day logins doubled the performance gap.”
Watching the market’s bouncing ball can also leave you more unhappy than if you only check in periodically. As Nobel Laureate Daniel Kahneman observed:
“If owning stocks is a long-term project for you, following their changes constantly is a very, very bad idea. It’s the worst possible thing you can do, because people are so sensitive to short-term losses. If you count your money every day, you’ll be miserable.”
So, don’t do that. Don’t let yourself look at the market’s daily news. Instead, nudge yourself into staying focused on what really matters by limiting your looks to quarterly, or even annual performance reviews.
Mental Accounting Tricks
Mental accounting is another behavioral bias that can help or hurt you. We’ve all engaged in it when we create arbitrary rules to “organize, evaluate, and keep track of financial activities” (as described by Thaler’s paper, “Mental accounting matters”).
The trick here is to be deliberate about which money management rules you establish for yourself, and why.
For example, imagine you’ve inherited some stock your mother held most of her life. You might subconsciously categorize these shares as legacy money, and treat them differently than your other investable assets. Even if you’d be better off selling some shares to best preserve their lasting value, your mental accounting of what feels like “Mom’s Money” may stand in the way.
Instead of letting mental accounting hinder your best use of the inheritance, redirect it to make the most of her loving legacy. For example, you could consider selling the stock, accounting for most of the proceeds as “future wealth,” and reinvesting it accordingly in a less-concentrated manner (paying yourself first). You could then assign a portion of it to funding your kids’ college, and another batch of it for a fun family outing your folks would have loved.
While you’re not actually required to spend the money as accounted for, by effectively categorizing this money for these functions, you’re better positioned to enjoy the inheritance, without squandering it.
Blind Ambition
We’ve barely scratched the surface of strategies for turning your instincts and biases into wealth-building tools rather than weapons of financial destruction.
Arguably, one of our greatest behavioral foibles may be blind-spot bias, or our inability to see our own biases, even when we can readily spot the same tendencies in others.
Earlier, we referenced Nobel Laureate Daniel Kahneman who, throughout his long life, explored his own and others’ behavioral biases. Among his greatest habits was to go out of his way to seek feedback from others, especially those whose temperament and perspective differed from his own. In his final publication, “Thinking, Fast and Slow,” Kahneman explains:
“We are often confident even when we are wrong, and an objective observer is more likely to detect our errors than we are.”
At Mejlholm Wealth Management, we believe one of our most important roles is to serve as our clients’ “objective observer,” holding up a mirror whenever a blind spot may be blocking their financial view. If we can assist you in similar fashion, we hope you’ll be in touch with us today.