The Horowitz Inspector General’s report concluded that no one testified that political bias let to certain actions that resulted in FBI surveillance on the Trump Campaign for President in 2016. This means that the word “Bias” is back in the news in a big way.
This led me to think about various forms of bias that we find with investors. We should all be aware of these biases and make sure to avoid them in lieu of unbiased rational reasoning, if possible. This is hard to do, but we can try. Here are some common biases we find in investing:
- Anchoring Bias: This is where an investor gets caught on one piece of the puzzle and doesn’t see the entire picture. For instance, think about someone who bought GE all the way down to its current price of about $11 (although it hit $8 earlier this year and may be on the rebound). That person may have thought, “It’s GE, for cripes Pete! It has to turn around!” And it may, but that investor may have lost a lot of money on the way down because they were anchored in GE’s past glory and not in GE’s troubled waters ahead.
- Confirmation Bias: This is where an investor has a preconceived notion of a company’s direction and then seeks and promotes data that only promotes that notion and disregards countervailing data. For instance, a customer may have a bad experience in a restaurant that is an outpost of a publicly-traded company. The customer decides, as a result, the company is going under and so they short the stock. Their anecdotal experience may reflect on the entire company, or more likely it reflects on that customer’s unrealistic expectations, or maybe something like the Yogi Berra phenomenon of “nobody goes to that restaurant anymore because it is too crowded”.
- Overconfidence Bias: This is where an investor or perhaps an investment advisor thinks they are better than they really are. Think about Garrison Keillor and his fictional Lake Wobegon, where everyone was “above average”. Overconfidence and failure to consider that one may be wrong about an opinion can lead to poor decisions. For instance, maybe you have invested in 3 new stocks over the past few months and all of them have gone up. Now you think you are either on a hot streak or have gained some wisdom that others don’t have and so you bet the farm on the next play you see because of your high level of self-confidence. What could go wrong?
These are just a few examples of bias that we Financial Planners see. They are part of the growing fields of Behavioral Psychology and Behavioral Finance. It is difficult for someone to be sufficiently self-aware that they see these biases in themselves. This is another reason why you should work with a Financial Planner: To get a third-party (hopefully) unbiased take on whether or not you are biased in some capacity when it comes to your own finances.