Think about the last time something bothered you. You may have seen something you didn’t like, or someone may have said something that you didn’t agree with. Chances are you exhibited some sort of eye blocking behaviour, such as covering your eyes, squinting, or lowering your eye lids for a prolonged period of time.
This type of behaviour reveals the human brain is dealing with some sort of stress. How do we know this? In 1974, Joe Navarro studied children who were born blind. During his research he found that when they heard things they didn’t like, they didn’t cover their ears, they covered their eyes. It’s hard wired in us.
The human brain is capable of incredible things, but it’s also extremely flawed at times. When it comes to investing, our brain doesn’t let us off the hook. There are around 188 cognitive biases that can have a profound effect on how we process information and our investment decision making. Whether it’s confirming existing beliefs, extrapolating information from the wrong source, or failing to remember events the way they actually happened.
Here are five common cognitive biases that throw investors:
Here are 18 other biases worth knowing about.
We’re not going to change the way our brain responds to things it’s presented with, it’s just how we’re wired. But we can be aware of our own biases before making an investment decision to help avoid missing out on what the market is offering us.
To illustrate this point, I share with you the results of an annual study undertaken by Dalbar, which highlights the ‘Behaviour Gap’. The chart shows the annual return for the US stock and bond markets, as well as a Balanced Portfolio, and compares this to what the average investor in each of these indexes and portfolio returned for the same period – voilà the Behaviour Gap. According to Dalbar, psychological factors make up at least 50% of the chronic shortfall. But hey, this doesn’t apply to you because you’re above average.
So next time when you ask your colleague, friend or a family a question and they start to cover their eyes, squint, or lower their eye lids for a prolonged period of time, chances are they didn’t like the question you asked. Now that you know, don’t hold it against them – it’s just how they’re wired.