You could be getting in the way of your own financial success! Financial professionals Joe Anderson and Alan Clopine discuss investor biases that interfere with sound investment decisions. To get more in-depth information look at Your Money Your Wealth show #509, “Investor Boot Camp”.
Joe: Let’s get into some biases because we’re all overconfident about certain things. We’re under confident about others. When it comes to our money though, our mind plays tricks on us where we probably shouldn’t be equipped to handle money.
Alan: You’re right, Joe, and I think, I think overconfidence probably is maybe the first one to talk about because we all think we’re better investors than we really are. And so, you can look at different studies and check this out. So, 94% of college professors think they’re above average teachers, and about 80% of drivers think they’re better than average and that just can’t be, average is 50%. So, there’s no way the numbers work out. Now, how this translates to investment, investing is we pick a good stock, we pick a good mutual fund and all of a sudden, we think we’re smarter investors than we really are. And if we pick a bad one, oh, that was just bad luck. So, we’re attributing it to our wonderful prowess at investing and Joe, that’s a dangerous way to go.
Joe: It sure is, I wonder how many people you just annoyed. They’re like no, I am a sophisticated investor, Alan. I’m never lucky, you know I’m never unlucky, right.
Alan: I will tell you, Joe, doing tax returns for my whole life, I see people they tell me how good they are at stock picking and then I do their returns.
Joe: Right, and then you see all the losses?
Alan: Lots of losses, yeah.
Joe: And speaking of losses is that here’s what our brain does. You know we’re twice as fearful to lose money than we are to gain, right. So, we have a lot more pain when we see that money go down than we are happy when we see the money go up. That’s what makes us make rational; you know irrational decisions. Is that okay you see the market go up, hey it’s okay, all right that’s what it’s supposed to do, and then you see that sharp turn. It’s like all that pain comes up and we have to react. It’s like that train coming down the track; we’re born to get out of the way. When you see your portfolio go down. That’s our natural reaction is to do something, to take action. In most cases, it is the wrong action.
It’s that fear and greed mentality that we have is that when the market goes up, oh we got to buy because I want to keep making all this money, look at the market it’s doing fantastic. And then when the market goes down, that’s where the fear comes in. It’s like oh my gosh I’ve got to live off this money. I need every cent of it. So, I got to sell and just hopefully just keep my nest egg the way it is. But then all of a sudden as soon as we do that we see that market go back up again. You tell me if this is the market where would you want to buy? Where would you want to sell? If you think of it like this, I probably want to sell here and buy here, but we do the exact opposite. Right, every time I know, it’s a lot easier said than done, when you’re in the mix of things it’s like oh boy what do I do. It’s a real issue.