Behavioural finance: 5 effective ways you can reduce the impact of bias

25/04/2024

When you need to process information, it’s common to take shortcuts and rely on bias. It’s an approach that can be useful in some situations, but it can also lead to decisions that aren’t right for you.

If you’re making financial decisions, you know you should focus on facts, but emotions and other influences can creep into the decision-making process. 

Last month, you read about some of the ways bias may affect your financial decisions. From herd mentality to confirmation bias, it can have a larger effect than you may think.

So, what can you do to reduce bias? Here are five effective ways you can focus on what’s important. 

1. Learn to recognise when bias could be affecting you

One of the first things you can do to reduce the effect of financial bias is simply be aware that it could happen.

Understanding why bias happens and when it may affect your decisions means you’re more likely to take your time to think things through.

Asking yourself questions can be useful:

• Is this investment appealing just because others are buying shares?
• Am I dismissing information because it doesn’t paint the picture I want?
• Have I researched my other options?

Sometimes just remembering that bias could occur is enough to make you take a closer look at your decisions. 

2. Take your time when making financial decisions

While making quick decisions can be useful in some aspects of your life, taking a step back and giving yourself some time is often valuable when making financial ones.

Decisions around investing or your retirement could affect your wealth for years to come. So, it’s worth giving them the attention they deserve and thoroughly researching your options. 

You’re more likely to overlook important information if you make a snap decision. To compensate for this, you may instead rely on biases or gut feelings. While it may feel right at the time, it means you could be making decisions that don’t make financial sense for you. 

3. Tune out the short-term investment noise

One of the reasons that biases can affect investing is that it can be all too easy to focus on short-term market movements.

A company’s shares soaring or tumbling dramatically in a day makes a great headline or talking point among friends. But rarely is it something you should act on and it’s easy to attach too much importance to these short-term results. 

When you first create an investment strategy, you should set out your long-term goals and how you’ll achieve them. Investment decisions should focus on the long term to reflect this. While looking at long-term performance may not be as exciting, as the peaks and troughs often smooth out, it can help you stick to your plan. 

While it can be difficult, tuning out the noise and market volatility can help you focus on your investment strategy. 

4. Scrutinise the decisions you make

When making financial decisions, playing devil’s advocate can be useful. It can help you question why you’re making certain choices and fully explore alternatives. 

If someone else was asking for your advice, what questions would you ask? Would you be satisfied with the way they interpreted the data? Trying to look at your decisions from an outside perspective can be valuable. It allows you to re-evaluate the information and see if you draw the same conclusion. 

5. Work with a financial planner

Sometimes, simply having someone to discuss your decisions with can help highlight where bias may be occurring. 

As financial planners, we can work with you to create a financial plan that focuses on facts and long-term goals. Having a tailored financial plan can give you confidence and mean you’re less likely to act on bias. 

We’re here to answer your questions too. So, next time you see an investment that you’re tempted by, but you aren’t sure if it’s right for you, you can contact us. Having someone to turn to can reduce the chance that you react to news or information quickly, rather than giving yourself time to process it. 

If you’d like to arrange a meeting with us to discuss your investments or overall financial plan, please get in touch. 

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.