The Biases We Bring to Investing: Investor, Know Thyself!

February 28, 2022

If you want to become a better investor, increasing your investment knowledge is not enough. You need to increase your knowledge of yourself.

Developing self-awareness can be as important as developing an understanding of the current investment landscape or studying economics. Psychology is a large part of becoming a successful investor. For example, I’ve written before about flight, flight, freeze, and fawn responses in the investment world.

I was joking the other day that the title of financial advisor should be financial therapist. I’m no therapist, but my-oh-my how much psychology goes into the financial planning process, and how many positive or negative experiences money brings us as individuals within our unique family structures.

It is a gift to be a part of the lives of our clients and their own stories. It’s also a challenge because financial advisors and their clients all have biases. It’s part of being human. Visual Capitalist has a great one-page chart that features many of them. Familiarize yourself with it and think through some of them via a financial lens.

Here are a couple questions to ask yourself: 

1) How might your confirmation bias—noticing the things that confirm your existing beliefs—impact changing your portfolio in response to a fill-in-the-blank news item?

2) How will your tendency to be overconfident about whether the market will only go up for several more years or always sit on the perilous edge of crashing influence your investing decisions?

3)How might you use anecdotal evidence to reinforce your own investment worldview and frame your own story about money?

  • Grandpa got burned by the stock market, so I won’t go near it.
  • Mom and Dad had a bad experience with a financial advisor; therefore, I will do it all myself.
  • I inherited a bunch of money from my beloved Uncle who did well with his portfolio, so his investments must be good enough for me.

All of us bring ourselves—our brains, our experiences, our stories, our relationships—into how we think about money. Self-knowledge itself is a great start to increasing your investment knowledge.

Investor, know thyself!