How biased are you?

OK, that might sound like an overly aggressive question to begin with, but please bear with us… Because human behaviour and unconscious biases are too often the undoing of the best laid investment plans. So, we thought it might be useful to set out a few biases that can creep up and afflict the best-intentioned investors.

Anchoring Bias

“Past performance is not a guide to future performance” is a very important and widely used warning that is given to investors when considering many investment decisions. But it’s very hard to ignore the past performance of a fund or individual share! This is anchoring bias, where you “anchor” your decision based on a past piece of information, when instead the decision should be forward looking, considering the fundamentals underpinning an investment opportunity and based on a carefully considered investment approach.

Loss Aversion Bias

This is a really interesting bias that is based on research that has found that humans find the pain of losing twice as powerful as the joy of winning. We all enjoy that sudden windfall where we find €100 stuffed in a pocket. But this joy is fleeting compared to remembering that we left €100 at the ATM – the pain of this one gnaws away at you for approximately twice as long.

We also see this with retired sports stars who reflect on their careers. Winning was great and they certainly derive satisfaction from it, but the pain suffered by the ones that got away eat away at them to a much greater extent. The golfer Doug Sanders missed a 3 foot putt to win the British Open at St. Andrews in 1970. When asked many years later how often he thought about it, he replied that, “It’s got much easier, I only think about it roughly once per day now”.

The impact of this bias for investors is that they can become frozen into inaction because of an overstated fear of losing money. And as a result, they miss great opportunities.

Confirmation Bias

We all have opinions and beliefs, many of which are simply hunches and are based on poor information. These can lead to poor investment decisions, where investors receive information that appears to confirm their previous thoughts as being correct. It results in someone too-quickly nodding and reaching the conclusion that this later information confirms what they always thought and knew, and then the investor proceeds along that ill-researched path.

Experienced investors guard themselves carefully against confirmation bias. Charlie Munger who is Warren Buffett’s partner at Berkshire Hathaway once said: “Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.” This takes careful and valuable restraint.

Recency Bias

This is similar in ways to anchoring, but not necessarily to a single event. Many people would have bet their house on the Dublin Gaelic football team winning their seventh title in a row this year, and would have done so because the Dubs had been so dominant in recent years.  How could they lose, the Dubs always win? But of course lose they did when Mayo squeezed past them in the All-Ireland semi-final.

Just because there was a pattern to events in the past, this does not mean that this will continue into the future. Football teams age and players change and the same applies to investing. Just because a “star” fund manager knocked it out of the park in recent year does not mean he or she will do so in the future. Again investors need to carefully consider the fundamentals, and look coldly at the future instead of wistfully at the past.

These are just some of the biases that can impact investors. When you consider also the temptation to try and time markets, to meddle too much with investments and having an inability to cut out the constant noise and chatter surrounding investments, it’s not easy being an investor today! For this reason, it is so important to have an expert, reasoned voice in your corner gently guiding you and helping you to avoid negative biases and making mistakes. This is the role that your Invesco consultant plays every single day, helping you to manage yourr behaviours, grow your wealth and ultimately achieve the life you want to live.