Insights for Investors: Does Personal Bias Impact Investing?

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By Maurice Stouse, Financial Advisor and Branch Manager

Maurice Stouse

Many researchers and writers have often reflected on a topic known as behavioral finance (BF). Quite simply it is what impact do personal cognitive biases have when making investing decisions. It is an important concept to consider as ultimately investment decisions are made based upon what we believe, learn, hope and fear. Our biases tend to limit our ability to make purely rational decisions. Media can influence these biases. While there are multiple biases investors should be aware of (lest they make poor investment and financial decisions), we will focus on three very common ones. Let’s explore them.

Confirmation bias is first among these. We are all prone to confirmation bias. It impacts professionals as well as individual investors. Essentially, confirmation bias means seeing or hearing a story or reading information that confirms what we already believe and placing a high degree of value in it.

Next is loss aversion or myopic loss aversion. This happens when investors fear losses more than they get pleasure from market gains. In other words, investors are far more likely to give higher priority to avoiding losses than making money.

Thirdly, is something called herding (or bandwagon effect). Herd behavior is when people mimic the financial behaviors of most of the herd. Herding is notorious in the stock market as the cause of dramatic rallies and sell-offs. It can create asset bubbles; think of the tech bubble in the late 90s or the housing market up to 2008 – or market crashes.

How does knowing about behavior finance help? By understanding how and when people succumb to biases, behavioral finance can provide a blueprint to help us make better, or more rational decisions when it comes to investing and financial matters. What then do we suggest investors do? Be aware of your own biases. Peter Lynch pointed out in his book, “One Up on Wall Street”, years ago that investors should look at the products and services that they know or believe in and consider investing in those companies. Note that is the starting point and not meant to be the only point. While there is a plethora of information available in this open research world, we encourage investors to use their own research as well as professional input, from advisors as well as from sources they locate online or through publications like The Wall Street Journal.

Investment Strategy Quarterly is now available from Raymond James. Clients and interested investors can now access the review of the first quarter 2023. It is replete with not only investment and economic review but commentary on the pending debt ceiling issue, international issues as well as insight and recommendations on market sectors, interest rates, inflation, employment, and other important topics.

We take note that these are the times for investors to step back from the current and pending volatility and concentrate on the opportunity to invest in businesses for the long run. Depending on your situation, we think it could be an opportunity to increase the holding of bonds and fixed income securities. Lastly, the so-called risk-free rate of return is typically close to the inflation rate and that is approximately 5%. Investors can (in the short run) be compensated by waiting or take risk off of the table and put money into short term accounts that pay at or near the 5% range.

In the end, attaining any goal means building a plan and investing according to that plan and trying to lower personal biases as well as the noise from the media. Expect that investing at times like these can be more volatile due to debt ceiling, banking, international and economic issues.

Maurice Stouse is a Financial Advisor and the branch manager of The First Wealth Management/ Raymond James.  Main office located at The First Bank, 2000 98 Palms Blvd, Destin, FL 32451. Phone 850.654.8124. Raymond James advisors do not offer tax advice. Please see your tax professionals. Email: Maurice.stouse@raymondjames.com.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. The First Wealth Management and The First Bank are not registered broker/dealers and are independent of Raymond James Financial Services. 

Views expressed are the current opinion of the author and are subject to change without notice. The information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results.  

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