Let me start by saying that Investing is not easy by any means. But the choices you are making and the reasons behind them, may be causing you to make the biggest mistakes in your investment decisions. As a professional my job is of course to do the obvious things a Financial Planner would do for their client. At the same time I spend a lot of time decoding what is going through my clients head to ensure their decisions and motivations are in their best interest. Unfortunately for an investor left to their own means, it is very common that a rational decision can be swayed through an emotion or other psychological influences causing the investor financial harm. These types of irrational decisions are studied and explained in what’s called behaviour finance.
One very common mistake we all have made and is covered in behavioural finance is “Availability bias”. Availability bias essentially is a human cognitive bias that causes us to overestimate probabilities of events associated with memorable or dramatic occurrences. Availability bias is very common to all of us. It causes people to overestimate the likely hood of a shark attack, plane crash and even winning the lottery. Advertising of an old man smoking can cause people to feel like smoking is less harmful to you. A recent plane crash in the news causes an increase in other modes of transportation or delayed trips. We unfortunately have all fallen victim to this type of response.
When it comes to your finances though how does availability bias affect you? Fear is definitely a major contributor. The news is full of articles reminding us of the dangers surrounding us. This is what tunes us in and helps sell papers and advertising. When it comes to fear and your investments, these types of news stories maybe affecting your investment decisions as well as our long term goals. Everyone remembers the financial crisis of 2008 like it was yesterday. For years to follow the media reminded us of this time period and all the current risks that could affect your investments moving forward. The US debt ceiling, Greece defaulting on debt, Brexit, and a Donald Trump election victory are all examples of stories that kept many people on the side lines and many more fearful of the collapse of their retirement accounts. Let’s not discount these issues, but let’s look at the reality of the numbers and those that were influenced by their fears. On March 6, 2009 the Dow Jones hit a low of 6,443.27 keeping many investors on the side lines in fear that the market would go lower. It is now Aug 2, 2017 and the Dow Jones hit 22,000. Not only did many investors miss out on making a lot of money, there are many that sold near the low of 2009 and lost a fortune.
I love the Caribbean and enjoy vacationing on their beautiful beaches. I also love the water and spend great deal of time doing all sorts of water sports including diving and surfing while I’m on vacation. I can remember 1 trip in particular where I would start my morning off with a coffee and watching shark week on TV. Why I would watch a show centered on people being attacked while swimming or surfing less than an hour from jumping into those exact same water boggles my mind even to this day. Even as I floated on my board waiting for the next set, I couldn’t help but think about the last episode and if I’m going to be the next casualty. What is important here is that at the end of the day I still went into the water. Watching shark week was clouding my reality. It was making me feel that being attacked by a shark was only a matter of time, even though the rational side of me knew that the odds of being attacked and killed by a shark are around 1 in 3,748,067. If I let my availability bias take over my rational mind, I may have never stepped back into those beautiful oceans again.
Ask yourself, has an availability bias caused you to make an irrational decision with your investments.
Here is a great video that discusses Availability bias when it comes to investing.
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