“We are often confident even when we are wrong, and an objective observe is more likely to detect our errors than we are” – Daniel Kahneman
Something that’s truly objective has nothing to do with a person’s own feelings or views—it just deals with facts. When building a strategy to achieve your financial goals an objective perspective enables you to follow the most efficient path based on facts, rather than be guided by what ‘feels’ like the best avenue, and often leads to adverse consequences.
Unfortunately, however, humans by nature are not objective and are riddled with cognitive biases which often sway their financial choices.
There are a number of common cognitive biases that can impact financial decisions.
There is the ‘halo effect’, where a person is prone to making judgments in the course of decision making based on a limited set of information. This occurs commonly in property investing where an investor finds a property visually or personally appealing and as a result applies this positive assumption to other elements of the property e.g., it’s capital growth potential.
The ‘horns effect’ is just the opposite. One bad experience with an investment in the share market can lead to irrational prospects of investing again.
‘Confirmation bias’ is a tendency to seek or place emphasis on information that confirms an existing conclusion or hypothesis. Investors will frequently notice news and reports that support their decision to make particular investments and filter out information which opposes that view.
In circumstances such as those we are currently experiencing economically, ‘loss aversion’ can take effect. This is a where the tendency to avoid loss creates a far more powerful emotional impact than that when one is experiencing gains. This can lead to short term decisions that fly in the face of a long-term strategy and can cause irreparable impacts.
These are just some of the many cognitive biases that as human’s we are susceptible to. These biases find their roots in our evolutionary development. At one time they served a purpose when we were more primitive in nature to help us to survive.
That’s not the case anymore, today we apply these same biases to allow us to generalise in order to help us sort through the myriad of information we receive every single day.
Having the awareness to recognise these biases in ourselves is difficult enough, let alone objectively evaluating and overcoming them.
A financial adviser can help you make objective financial decisions in your financial life. Book an appointment with an Advise Wise Financial Adviser today to discuss how we can help you.
If you’d like to discuss your current situation or have any questions please contact us.
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