investing biases

By Ginger Szala, ThinkAdvisor

What makes us strong as human beings makes us weak money managers, because of investing biases, says Daniel Crosby, Ph.D., president of Nocturne Capital. He added that fear is hard-wired into the human — and animal — brain, and we have an affinity to be loss averse.

“In the financial markets, what we think we ought to do and what we do are different,” he said. “In times of financial stress people lose 13% of their IQ.”

Further, he noted that “the body has a huge impact on how we make all decisions, including financial decisions.”

He added that we also reason collectively, in which our brain’s sensation and perception area can be changed to see what the collective believes.

“The body is weak, brain is old and outdated, and society ‘truth’ isn’t absolute truth but is what we agree on,” he said. “This impinges on our financial decision making.”

He says there are common behavioral errors that affect investors thinking. These include:

1. Overconfidence or ego

People are especially more positive as a defense factor, he said, especially men, who when surveyed, thought themselves friendlier, funnier and better looking than average. Crosby said the researchers concluded that “the average man seems to think he is two sit-ups away from dating a supermodel.”

Ways investment advisors could deal with this include diversification within and between asset classes, building strong arguments, determining what usually happens and applying it to reality, and finding out what’s likely to be the weak link.

2. Conservatism

Typically, we stick with what we what we know. “We have a tendency to stay with what’s worked in past,” Crosby said. “If I know what to expect, it will hurt less.”

How investors can apply this: Buy what you don’t know, don’t know what you own, and procrastinate a little — e.g. people who sleep on a decision usually moved forward. Typically, he said, we overlook the powerful solutions because we look for the complicated solution.

“People try to game the system,” Crosby said. “But we need to put probability first.”

3. Emotion

People tend not to ask the sophisticated question. “We don’t ask if something is risky, but rather, is it fun?” He recommends overcoming emotion though meditation, or actually using emotion in a positive way.

He says that investors expect their advisors to have a high IQ or at least be competent, have a good bedside manner, be able to customize portfolios, have access through technology, be able to communicate one-on-one, and most of all, give them peace of mind.

________________

About LRPC’s Monday Morning Minute

Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.