Be conscious of your biases and where they may be steering your financial future
Do you recognize the following biases? If any of them apply to you, it could have a negative impact on your investment growth.
“Investing is simple. I can make better decisions than my financial professional—I just use her for some ideas.”
People tend to overestimate their expertise. On tests, however, most self-proclaimed experts score below average.1 Without the guidance of a trained financial professional, investors can make mistakes such as overtrading or not seeing the potential risks to their portfolios.
Loss aversion bias
“I’d rather not lose any money than risk even a small loss to gain more.”
Most people feel the pain of a loss more sharply than the pleasure of an equal gain. In other words, the unhappiness of losing $10 is greater than the happiness of finding $10. This loss aversion is why people may leave money in a savings account that earns less than the rate of inflation. It’s also why investors may be willing to take a risk to avoid a potential loss but unwilling to take a risk to catch a similar potential gain.
Illusion of control bias
“I can control my returns by timing the market.”
Some people try to buy when an investment is at its lowest point and sell when it peaks. The problem is that highs and lows are often clear only in hindsight. Most investors end up locking in losses and then missing the upturn. The tendency for people to believe they can control outcomes in situations where they can’t may urge them to take action when they likely shouldn’t.
“This investment has been underperforming, so it will continue to underperform.”
Do you try to predict the future based on past experience? People often assume likelihood from similarity, possibly neglecting more important facts. While investors may consider that recent returns will reflect future returns, the reality is that history doesn’t always repeat itself.
“I’ve seen that information before. It must be true.”
Have you ever looked up information to confirm something you believe while ignoring any information that might disagree with you? People often overvalue opinions that match their own and, as a result, may tune out vital information. Confirmation bias can make investors pay undue attention to or even actively look for information that confirms existing beliefs, whether that information is accurate or not.
“Everyone is buying, so I should, too!”
Growing up, your parents may have warned you that just because “everyone else is doing it,” it doesn’t always mean it’s a good idea; however, rather than analyzing an opportunity, herd investors will buy an investment simply because other people are buying.
“I’d rather have $100 now than $150 a month from now.”
Do you see your current needs as more important than your future needs? That bias prompts people to live beyond their means. For example, people often don’t put aside enough money for a comfortable retirement, as evidenced by 74% of Americans saying they’re worried about not having enough money saved for their retirement.2
Which biases do you have?
To learn more about behavioral economics and how it can help you make better financial decisions, contact a financial professional who can help you step back and see your behavior objectively.
Then, working together, you can map a road toward your long-term financial goals.
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There is no guarantee that any investment strategy will achieve its objectives. Past performance does not guarantee future results.
1 “The perils of overconfidence: Why many consumers fail to seek advice when they really should,” David R. Lewis, Journal of Financial Services Marketing, June 2018. 2 In July 2020, John Hancock commissioned our seventh annual financial stress survey with the respected research firm Greenwald & Associates. An online survey of 589 workers was conducted between 7/28/20 and 8/14/20 to learn more about individual stress levels, their causes and effects, and strategies for relief. John Hancock and Greenwald & Associates are not affiliated, and neither is responsible for the liabilities of the other.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein
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