Our emotions are powerful. It’s hard to not let them take over and impact decisions we make in life. What people often don’t think about is that our emotions often times impact our financial decisions, even though it may not seem like it. At Sherman Wealth, we often discuss behavioral finance with our clients and how behaviors can drive or impact our financial decisions as humans.
Investment biases get in the way of us making solid, un-clouded financial decisions. By acknowledging and familiarizing yourself with these behavioral biases, you can teach yourself to avoid them when you come across them. Here are some major behavioral biases to watch out for:
- Loss aversion
Loss aversion occurs when individuals are scared about an apparent “impending” negative outcome. When this happens, an investor, for example, could sell their stock when the market starts to tank. At Sherman Wealth, we always prioritize the long-term strategies and the importance of “time in the market”. When you feel these nerves coming on, stay calm and be sure to maintain a balanced portfolio.
2.Bandwagon effect
Do you consider yourself a leader or a follower? The bandwagon effect refers to individuals that follow the investment decisions of the crowd, because they are popular. As you will hear from us several times, make sure to do your own research and feel good about an investment before jumping into it because its “popular” or “trendy”.
3.Sunk cost fallacy
Dwelling on past and poor decisions is something we all have a hard time coming to terms with. The sunk cost fallacy prevents individuals from being able to fully move on from a poor investment, solely based on time and money they have put into it. If something is continually dragging you down, stop investing resources in it and consider that it may be best to move on.
4. Confirmation bias
As humans, we enjoy and seek for confirmation about our previous decisions, which often times allows us to be clouded in the reality of the situation. Before making big investment decisions, make sure to do proper research in order to make informed decisions.
Confronting these behavioral biases can help you avoid making clouded decisions in the future. If you have any questions or want to learn more about how to avoid behavioral biases, schedule a complimentary 30-minute meeting here.
