A bias is simply a mental shortcut that helps us deal with the huge amount of information we’re faced with every day. Where we don’t have time to do a thorough analysis, a preconceived notion helps us quickly make a decision and move forward.
Biases aren’t always bad, like having a bias against snakes that have a diamond pattern on their back that coil and rattle when disturbed. If you come across one, your bias instantly tells you to get away from it. And nobody is going to convince you that you should go up and closely examine the writhing creature to see if it’s a venomous rattle snake or just a harmless gopher snake.
But there are lots of times when biases can be a drawback. Like in investing.
When you’re using a long-term strategy of diversification to participate in the potential gains of global stock markets while hedging against its unpredictability, a bias can harm your long-term results. Pre-conceived notions can lead you to take actions based on incorrect information.
The list of investing biases is long, but here are three important ones that are quite common.
This occurs when you “anchor” your decision to a reference point in the past. Daniel Crosby in his book The Behavioral Investor explains that when you meet someone new you immediately begin forming opinions of them. “These first impressions, or anchors, then set the guardrails within which future impressions tend to fall.”1
In investing people often “anchor” on some early aspect of an investment and then use that as the measuring stick by which to gauge all future decisions about that instrument. This can also be called “mental accounting.” Most often, we tend to anchor on the highest price of a portfolio or asset and then measure short term decisions from that point. Doing so can be financially dangerous as realizing a long-term average return requires sitting through periods where investments are priced both above and below the average.
The way information is presented, or framed, has a major effect on how we perceive it. Marketers know that you’re much more likely to buy a beverage that says, “10% real juice” on the label than one that says, “only 90% artificial ingredients.”2
In investing people tend to frame the performance of a stock or sector depending on how they want to feel about it. If someone’s hot stock “sure thing” ended up losing 25% of its value year-to-date, maybe they can make themselves feel better about picking it by looking at its three-year average.
Barbara Streisand described this bias perfectly when she sang, “What’s too painful to remember we simply choose to forget.”3 And often we don’t even choose to do this. Our memories automatically adjust themselves to make us more comfortable.
Writing about why this bias is detrimental for investors, Nobel laureate Daniel Kahneman observes, “hindsight bias leads observers to assess the quality of a decision not by whether the process was sound but whether it’s outcome was good or bad.”
In other words, it keeps you from accurately judging how you behaved in the situation, and so prevents you from learning from your mistakes.
Because the market is so complex and so unpredictable, it’s tempting to let your biases give you the illusion of understanding and control. We can help you accurately assess your long-term strategy and reinforce the positive behaviors intended to keep you on track toward your goals.
Have a great weekend!
Source: Efficient Advisors
Golf Tip of the Week
Fix Your Putting Stroke
These practice drills will help you stop peeking too soon. Once you calm the instinct to chase the ball with your eyes, you can focus on swiveling your head toward the target, like the pros do.
First, hit some three-footers left-hand-only with your right hand holding your left shoulder in place. If the left shoulder stays down, you’ll swing the putter toward the hole. You can also do this drill with your left hand choked down so the grip is against the forearm. That gives the sensation of your left arm and the putter moving together down the line with the face square. After a while, putt normally and strive for the same feel.
For a second drill, set up five feet from a hole and place a ball marker just behind your ball. The marker should be partially hidden when you take your address. Practice hitting putts focusing on seeing the ball move away from the marker. This drill will keep your head down a fraction longer and help the putterhead swing on a straight path with a square face.
Tip adapted from GolfDigest.comi
Recipe of the Week
Perfect Egg Salad
- 12 large eggs
- 1 teaspoon salt
- 1/4 teaspoon fresh cracked black pepper
- 1/4 cup finely chopped celery, (or dill pickles)
- 1/3 cup whole egg mayonnaise, or Japanese mayo
- 2 tablespoons Dijon mustard
- 1 tablespoon horseradish
- 3 tablespoons fresh dill, finely chopped
- 2 tablespoons fresh chives, finely chopped
- 1 tablespoon fresh parsley, finely chopped
- Pinch of paprika
- Carefully add eggs to a large pot. Fill pot to cover eggs with cold water at least 1-inch above eggs.
- Bring to a rapid boil over medium heat. Let boil for 1 minute, then cover with lid and remove from heat. Let the eggs stand in the hot water for 10-12 minutes. DO NOT LIFT OR REMOVE LID.
- Transfer eggs to a bowl filled with cold water and let cool for about 5 minutes.
- Peel eggs and chop into quarters.
- Transfer chopped eggs to a medium-sized serving bowl. Season with salt and pepper.
- Gently fold in mayonnaise, Dijon mustard, horseradish, celery, chopped herbs and a pinch of paprika. Taste test and adjust seasonings, if needed.
Recipe adapted from CafeDelites.comii
Health Tip of the Week
Is There a Best Time to Drink Water?
There’s no doubt that water is essential to your health. Accounting for up to 75% of your body weight, water plays a key role in regulating everything from brain function to physical performance to digestion — and much more. Still, while it’s clear that drinking enough water is important to health, you may wonder whether timing matters.
- Drinking water first thing in the morning can help start your day on the right foot. However, while it may help some people increase their daily water intake, there’s no evidence to suggest that drinking water in the morning is particularly beneficial.
- Drinking water before a meal may help decrease the number of calories consumed at that meal, especially in older adults.
- Drinking plenty of water before and after exercising can help replenish fluids and maximize performance and recovery.
- Your body tightly regulates its water balance, and drinking too much at one time can lead to serious side effects.
The most important thing is to drink water consistently throughout the day to stay hydrated.
Tip adapted from Healthline.comiii
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