Understanding financial bias: How can you reduce the impact?
For our final blog in our financial bias series, we’re going to look at some of the steps you can take to reduce the impact of biases when making decisions.
We’ve already looked at what financial bias is, where bias can come from and some of the most common types of financial bias. Financial bias can have a significant impact on your wealth as you may not make decisions that are right for you, with your goals and circumstances in mind. So, what can you do to reduce the impact of financial bias?
Be aware of financial bias
The first step is simply being aware that financial bias exists and, at some point, has probably affected some of the decisions you’ve made. Keeping some of the most common types in mind as you make financial decisions can give you a chance to reflect on what may be affecting your conclusions.
Try to remove emotions from the process
You may remember from our blog looking at where bias came from that emotions were one of the key factors. Emotions naturally play a role in decisions but recognising them and focusing on a logical, appropriate response can help you mitigate the impact of bias.
The stock market volatility experienced earlier this year is a good example of how emotions could have affected your decisions. Facing headlines saying ‘stock market plunges’ amid the Covid-19 pandemic is naturally going to promote worries and concerns about your financial security. However, rationally, we know that short-term volatility is to be expected when investing and, historically, markets have recovered.
Be critical of the information you use
Last month, we looked at how some financial bias came from giving too much weight to certain pieces of information. With so much data, opinion and other information at our fingertips, it can be overwhelming. Being critical of the source of information and assessing how trustworthy or relevant it is can help you weigh up how much value it is to you during the decision-making process.
Remember to seek out and be open to information that may go against what you already believe. While you may be correct in your initial assumptions, challenging existing opinions can help to mitigate bias and provide confidence.
Recognise your own errors
Going back to our blog looking at where bias comes from, heuristic simplification was one. This is where we make mistakes when processing information. Sometimes we need longer to understand information, recognising when can help you avoid errors. It’s a step that can help you eliminate mistakes that could affect your long-term financial security. Taking some time to review information and decisions can flag up mistakes you may have missed the first time around.
Focus on your long-term financial plan
In some cases, financial bias can lead to investors making snap decisions based on short-term emotions, market movements and other factors. However, it’s your long-term goals that should remain at the centre of the decision-making process. Keeping in mind what you’re investing or saving for can help stop you from making decisions due to short-term factors.
Screen out the investment noise
Linking with the above point, too much information, especially those focused on short-term factors, can provide an opening for bias to affect your decisions. Screening out all the investment noise can help here.
While regular reviews are important, say once a year or following a life event, try not to place too much weight on the more regular updates you’ll be faced with. This may include daily market movements, short-term volatility or news about certain companies. Have faith in your long-term financial plan. Remember, it should be well-diversified and tailored to you with the bigger picture in mind.
Work with a financial planner
Finally, choosing to work with a financial planner can provide you with an opportunity to reduce the impact of financial bias for several reasons.
First, it allows you to talk to someone else that understands your financial goals and situation. Sometimes, a chat is all you need to recognise bias is having an impact, other times another perspective can help highlight where decisions may not be in your best interests.
Second, a financial planner will help you put a long-term financial plan together, after considering what your aspirations are. It’s a process that can reassure you in the steps you’ve taken, meaning you’re less likely to be affected by other factors that cross your path.
If you’d like to discuss your financial plan with us, please get in touch. Our goal is to help each of our clients to create a financial blueprint that suits them, providing long-term confidence.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.