INVESTED: In Markets, in the Future, and in Society.

At Viewpoint, we believe that behavioural biases are one of the key factors influencing sub-optimal decision making. Because of this, we construct portfolio strategies that marry timeless investment principles with cutting-edge data science in order to guard against irrational investment decisions.

Without understanding how our brains are wired, investors may be at risk of making bad investment decisions; not because we aren’t intelligent and rational people, but simply because we are human beings. Our brains are magnificent organs, but they are prone to succumb to emotions like greed, fear, and impulsivity.

In an article from Kiplinger, Katherine Lewis outlines seven factors that may cause an investor to make bad decisions for their portfolio. Here are a few:

1. Fear of Missing Out. Some investors will invest simply because they have a fear of missing out (FOMO). The investment in question is usually trending, and people aren’t buying it because of its value, but simply because everyone else is buying it.
2. Overconfidence. Having confidence in your ability to make investment decisions is never a bad trait, however, some investors overestimate their financial skills and abilities. They believe that they know how the stock market will react to different scenarios, such as a tax increase, despite data showing the opposite result.
3. Living in an Echo Chamber. Confirmation bias is something that everyone struggles with and must actively work to counteract. We tend to seek out information that confirms our current beliefs, and rarely do we search for contradicting ideas. When you are making an investment decision, find research supporting both sides, sought out opposing articles, and protect your interests as you would a friend.
4. No Patience for Sitting Idly By. The action bias is the idea that results or value can only be achieved through action—this isn’t always true, especially when you’re talking about your portfolio. When you are trading often, you may be missing out on potential gains. “You get into the loop of selling at the low point and buying at the high point”. Resist the urge to trade and learn to hold onto what you have—this is a long-term game.

To avoid the impulses above, investors would be wise to utilize a strategy designed to keep your emotions in check. Ensure that your investment decisions are objective and aren’t being swayed by personal biases or current hypes.

You can be your own worst enemy when it comes to investment decisions. While being aware of your personal psychology and faults isn’t a panacea, it is the first step to improving your decision-making.