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I came across a survey recently from behavioral psychologist Dr. Daniel Crosby asking readers to highlight which behavioral tendencies impacted their behavior. The answer choices were: Ego (overconfidence); Emotion; Attention (noise); Conservatism (fear of loss). The largest percentage of respondents (35%), said Emotion had the largest impact with Ego (14%) as the smallest percentage.
Regardless of how you cut it, human behavior presents a huge challenge for making smart financial choices. It’s nearly impossible to overcome human brain wiring without help. The value of a steady hand has never been greater.
Investing Failure
The survey answers are interesting because individual investors are self-identifying what they perceive as their largest behavioral tendency. In reality, this recognition may be incorrect. The relatively small percentage that selected ego or overconfidence speaks volumes about just how blind most investors are to this particular behavioral preference.
Just because you can’t see a particular cognitive bias doesn’t mean it isn’t real. How you think about money (what you believe), directly impacts your behavior (what you do). Ego and emotion present huge obstacles for good financial decision making.
There’s an old adage that says “people don’t have investment problems, investments have people problems.” Investing failure doesn’t originate with the markets, it originates with the investor.
Behavioral Preferences
Most investment errors can be directly traced back to one of the behavioral preferences listed above. In essentially every case, these are unforced errors; mistakes that investors have created themselves through lack of discipline, fear, or greed. That’s the sickness. Financial planning is the cure.
When we meet with clients we often ask “what has your attention right now”? The answers to this query vary but often clients, (who are all smart and successful by definition), will respond with a concern about something happening in the stock market or the economy. Without our steady hand, I’m certain many of these folks would react to their concerns which is always a mistake.
Because behavioral preferences have such a dominant impact on financial decisions, it’s incredibly easy to keep falling into the same traps over and over again.
Stories Are Just Stories
Morgan Housel writing in The Collaborative Fund blog recently aptly described the issue, “Every investment is valued by taking a number from today and multiplying it by a story about tomorrow.” These stories don’t have to be based on logic or facts, they’re just stories. Investors can choose whatever they want to believe.
What you believe ultimately turns into the actions that you take. Behavior starts with what you believe.
When it comes to financial decision making, the cycle of human behavior is sadly repeatable and predictable. Real financial planning can provide the steady hand that you need to make progress. Start there.
Related: Personal Economic Fairy Tales Limit Smart Decisions