Fidelity's article 6 biggest pitfalls for investors covers human instincts and emotional biases that often undermine investment success.
These include "aversion to loss and ambiguity, following the crowd, and focusing on information that's recent or confirms what we already believe."
Key quote describing the impact of these biases:
"Our brains evolved to protect us from all kinds of primal dangers—saber-toothed tigers, earthquakes, dodgy-looking strangers from the other side of the river.
Trouble is, the instincts and mental shortcuts humans developed to manage life-and-death scenarios aren't all that helpful when navigating the twists and turns of the economy or riding out a rocky stock market.
In fact, these tendencies aren't just unhelpful—they can be harmful. They often prompt us to make decisions that seem rational but are self-defeating."
The same biases also can lead to bad business decisions.
The six biases in the Fidelity article are:
- Avoiding losses at all costs: Loss Aversion
- I am the greatest: Confirmation Bias
- Getting stuck on the first thing you see: Anchoring Bias
- The breaking news problem: Recency Bias
- There's safety in numbers: Herding Bias
- The devil you know: Ambiguity Bias
See Fidelity's article for more details.
We spend a lot of time identifying and analyzing how our biases impact our forecasts and the advice we give our clients.
We've also covered our advice on dealing with biases in the past. But the key points are worth repeating. These are:
- try to base critical decisions on hard data
- get multiple perspectives on key decisions.
- identify and understand how your views and beliefs may be impacting your decision making
- be open to change and accept that even strongly held business views and beliefs will need adjustments over time.
We've written a fair amount about decision-making biases in the past. These are consistently among our least read articles.
But this topic is simply too important not to cover.
