Behavioural finance biases are intellectual and emotional beliefs that can lead you to make irrational financial decisions — normally negative ones. These biases can expose you to extra risk or cause you to miss investment opportunities.A trusted financial advisor can play a crucial role in helping you recognise and overcome them.
What are the most common biases we see that can hurt your financial strategy? And more importantly, how does a financial advisor relieve them to keep you on track?
Overconfidence Bias
Have you ever been absolutely certain of your success, just to realise later that you didn't have all the information?
This is overconfidence bias, and it can lead you to overestimate your knowledge or abilities. Unchecked, it can result in misinformed decisions and unidentified risks that you might not have taken otherwise.
How can an Advisor help?
A financial advisor can give you a ‘reality check’ when needed. Drawing from knowledge and experience, your advisor can identify and explain the risks and rewards of certain financial decisions to help you make an informed choice. A second — expert — opinion in these cases can limit the adverse effects of unknown factors.
Loss Aversion Bias
People often feel the pain of a loss stronger than they feel the happiness of a win or gain. This is what the concept of loss aversion bias is based on. As a result of it, you can become overly cautious or conservative with your decisions which can reduce your ability to achieve your long-term financial goals.
How can an Advisor help?
An advisor can educate you about risk and help you understand your risk tolerance levels. They'll work with you to develop a plan that suits both you and your goals. By better understanding risk and what you're comfortable with, it's easier to stick to a set plan and obtain the long-term benefits of taking measured risks where appropriate.
Confirmation Bias
This happens when you seek out information that confirms your pre-existing belief while unconsciously ignoring or discounting contradictory evidence.
For example, you might like a certain stock, so when you research it you might only find or consider positive information about the company. This can lead to one-sided decisions that result in misinformed choices.
How can an Advisor help?
An advisor can act as a sounding board to help you avoid this, providing a balanced view of the situation and neutral advice on the financial decision before it's made. This might involve presenting different perspectives, doing due diligence, or conducting research to help you make the right choice.
Regret Aversion Bias
If you've ever suffered from choice paralysis, this can feel a lot like that.
Regret aversion bias stems from the fear of making the wrong decision, or worrying that you'll miss an opportunity and regret not taking it. It can lead to avoiding making a choice altogether or making an impulsive one instead.
For example, you might be unsure what to invest in — overwhelmed by so many options — and end up not investing at all. Or you might hear a certain stock is performing exceptionally well and impulsively buy before you miss out, but end up doing so at the peak of its value and lose instead.
How can an Advisor help?
An advisor can help you develop a disciplined approach to financial decisions. A good advisor can educate you on how to identify and analyse potential investment opportunities and provide advice when they occur. With their help, you can rest assured that any choices you make are well-informed and beneficial for your investment strategy.
People often struggle with biases because they don't realise they have them. An advisor can play a vital role by helping you identify them and overcome any negative consequences they could cause. By creating a well-defined plan and encouraging you to stick to it, they ensure that short-term emotions and biases don't interfere with your long-term financial goals.
Working with a trusted financial advisor can be crucial to your investment and financial success. You can turn to us when you need that second opinion or expert advice.
Get in touch to organise a complimentary consult with our team today.
Wade is the head of the Investment Services division at Cutcher & Neale and has over 10 years of industry experience in accounting and investment advisory roles.
Wade guides his division on the belief that investment portfolios should be built on transparency and flexibility. His expertise focuses on direct portfolio exposure to both Australian and Global Investment markets.
