Oct 30, 2019
This week, I’m talking about how you can avoid some of the biggest behavioral finance blunders. Essentially, behavioral finance looks at how your psychology, your emotions, and your biases impact your decisions and your behavior when it comes to your money.
Because your decisions about money, investing, and retirement can impact you for the rest of your life, being better equipped to make careful, self-controlled, unemotional decisions as often as possible is essential.
Today’s behavioral finance blunder is confirmation bias. Confirmation bias is the tendency to search for, interpret, favor, and recall information in a way that affirms one's prior beliefs or hypotheses. We are guilty of this and it’s part of what’s ripping us apart as a country right now. If you only follow friends on facebook or news outlets who share your viewpoint, you are guilty of confirmation bias.
When you fall victim to confirmation bias, you only see the intersection of the facts or data that already confirm your bias. It’s like making a decision with blinders on. You ignore what doesn’t already fit into your narrative, keeping you closed off to all the facts, and sometimes really important facts that should be weighed when making a decision.
Here’s how this is relevant for your money decisions. Let’s say you love tech stocks. You love technology companies so much that they make up your entire retirement portfolio. Instead of objectively looking at that situation and realizing what’s inherently wrong with owning companies from one sector, all you seek out online are stories and articles that confirm that technology will only go up from here. Or 3 additional tech stocks you need to add to your portfolio this year.
By not expanding your research and searching for reasons to NOT own tech stocks, all you’re doing is digging yourself deeper and deeper into the hole.
Succumbing to confirmation bias only serves to further entrench us in our skewed and bias beliefs. And when we don’t make a decision with all relevant information, we’re doing ourselves a disservice.
So here’s my challenge to you today. REsearch a topic from the opposite point of view from your own. Try to pick a topic where you’re already entrenched in your beliefs. Spend 15-20 minutes researching the topic from the other viewpoint and see if you can at least see the other point of view. Practicing open-mindedness is uncomfortable, but building this skill is incredibly valuable in all aspects of life.
Expanding your worldview and being open-minded to possibilities and opposing viewpoints can pay big dividends in your relationships and in the case of your money and investment portfolio, help you make better and smarter decisions.
That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip.
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