Managing your Money Behavior
Our unconscious strong biases affect our actions, our attitude and how we react to people and situations. Are you aware of your biases that affect your money managing decisions? “Investing success doesn’t correlate with IQ after you’re above a score of 25. Once you have ordinary intelligence, then what you need is the temperament to control urges that get others into trouble.”
– Warren Buffett
Usually decisions are made based on two pillars: beliefs and values. A decision maker’s values reflect his or her sense of what to strive for or to achieve, including goals and objectives. A decision maker’s beliefs are a reflection of his or her perceptions of reality, including facts, opinions, and uncertainties surrounding them. We believe that value and beliefs should be based on realistic scenarios and facts instead of emotions and psychological biases.
At its core, behavioral finance attempts to understand biases in human behavior when it comes to personal finance. It combines social and psychological theory with financial theory as a means of understanding how price movements in the securities markets arises independent of any
corporate actions (changes in the intrinsic value of the stock). It is the study of the influence of psychology on investors’ decision making.
Traits of behavioral finance are :
- Investors are treated as “normal” not “rational”
- They actually have limits to their self-control
- Investors are influenced by their own biases
- Investors make cognitive errors that can lead to wrong decisions
Below are few of the bias that you should stay away from :
As Warren Buffet said, “We don’t have to be smarter than the rest. We have to be more disciplined than the rest.” Decision-making is in the locus of our control. We have the power to break patterns of behavior simply by making better decisions.
| Bias | Meaning | Example |
|---|---|---|
| Anchoring | Fixing on rules of thumb or references that don’t serve your best interests. | “I lost all my money in the 2008 financial crisis. I am certain I cannot make money in the stock market anymore” |
| Recency | Remembering something that has happened recently compared to remembering something that happened a while back. | During the bear markets, people tend to forget about the outperformance in the bull markets. |
| Familiarity | Familiarity breeds complacency and investors tend to only invest in products they are familiar with. | By over concentrating in familiar assets (Physical Assets vs. Financial Assets), you increase your exposure to unnecessary market risks. We forget that “familiar” doesn’t always means “safer” or “better.” |
| Herd Mentality | People get influenced by peers and copy what others are doing. | “Everyone is doing it. I should too.” |
| Loss Aversion | Loss aversion causes investors to try to dodge bear markets, despite overwhelming evidence that market timing is more likely to increase costs and decrease expected returns. | No pain is better than a gain. We humans are hardwired to abhor losing even more than we crave winning. |
As Warren Buffett said, “We don’t have to be smarter than the rest. We have to be more disciplined than the rest”. Decision-making is in the locus of our control. We have the power to break patterns of behavior simply by making better decisions. The truth is it’s very rare for humans to make a genuinely logical, rational decision.
But a brief period of mindfulness will help you tackle psychological biases hands on. Relying on reflexive decision-making (going with your gut) makes us more prone to deceptive biases and emotional and social influences. Establishing logical and methodological decision-making processes can help protect from such errors. It is important to be focused on the process rather than the outcome.
We at TBNG understand that person’s behaviour has the ability to affect their performance & we consider it as our duty to help you understands the emotions and feelings that affect a person’s ability to make prudent financial decisions .As your financial life not only affects you but also your loved ones. Thus, minding your behaviour is a key aspect that is taught by a financial personal coach.