- There are some behaviors that occur in financial decision making that you want to avoid.
- Narrow framing, confirmation bias, anchoring, short term emotions, and herd behavior, are five behaviors that can significantly impact your financial decisions.
- If you have major financial decisions to make, gain clarity by talking over your thought process and options with a financial advisor.
The best way to get clarity is to have a good advisor
There’s a neat word association trick you can try with kids where you ask them, “Say the word ‘milk’ fast, five times.” The kids say “milk, milk, milk, milk, milk,” and you immediately ask them, “What do cows eat?” Nine times out of ten they’ll say “milk” and you’ll all laugh because of course, cows don’t eat milk!
It’s not so funny when we are dealing with behavior in finance and we make those kinds of mistakes with our money. I’m going to go over five behavioral financial areas that you want to be aware of as you are making financial decisions.
- Narrow Framing – This is where you make a binary decision, this or that. You’ve got money to invest. You decide you are going to buy this stock or that stock. However, you should be widening your view and looking at all the choices you have out there.
- Confirmation Bias – This favors information that you believe to be true, so when you see it, you’re going to act upon it. For example, you might say that when the GDP hits 2% going down, you’re going to get out of the market because you believe it means we are going in to a recession. But that would be fateful, as there’s no basis behind that other than your own belief and GDP could go right back up.
- Anchoring – This is where the very first information you receive is what you anchor on in making decisions. I remember back in the 80s, it was classic for people buying IBM to always do so when it dipped to a certain price. That was well known, everybody bought it there. Of course, people became so used to it that when it kept driving down, people were confused about how that could happen.
- Short Term Emotions – You’re going along, and suddenly, there’s a negative event. Let’s say the market goes down 10%, and you’re afraid, your emotional decision is to get out. Now, intra-year, the market’s gone down 10% six out of the last eight years. During that same time, it’s up over 200%. It could be disastrous if you reacted on emotion and got out that quickly.
- Herd Behavior – Not everyone can be wrong that’s doing the same thing, right? So, I’ll just follow everyone else. Remember the dot-com era? Everybody bought all those dot-com stocks at ridiculous prices and it went way, way up, then they lost everything when it busted and hit rock bottom.
When you run in to a situation where you have a decision to make around your money and you want to make sure you’re thinking clearly about it, get in contact with us. We’ll discuss it with you, walk you through your choices, and make sure none of these behaviors described above are affecting your decision making. The most important thing is to make good, smart decisions about your money.
Until next time, enjoy! Gary
A proven process for anyone overwhelmed by finances
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Gary Klaben is in our Glenview, IL office and serves our clients who are now located all over the country. He has over 30 years of experience and is the author of Changing the Conversation, The Wealth Sanctuary and co-author of The Business Battlefield. Whether advising his clients, mentoring his team, or coaching entrepreneurs, he is always simplifying complexity and motivating others to take the next action that’s right for them.
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