Sticking to a long-term plan can be difficult. We are constantly bombarded with news and noise that makes us question if we will have the future we want. A plan gives us the framework and roadmap that enables us to navigate through the short-term volatility that we are currently going through and will go through again in the future.
We can start to be aware of ourselves and wanting to act out emotions we are feeling through how it affects us physically. When we have an emotional reaction to a situation, we often display physical symptoms such as a red face, and increased body temperature or sweaty hands. These emotions are natural, and being aware of them can also make us aware of the behavioural bias that can follow.
Bias behaviour is as long-standing among humans as the English language. We each see the world through our own particular lens, and this affects how we process and react to information. Academics have discovered over 100 human bias behaviours, but we are going to touch on three of the most common below.
Confirmation Bias – Reading views/opinions that back up our preconceived idea.
This bias is very common and is being proliferated by the advent and abuse of fake news. The recent case of the very negative article about the Gates Foundation wanting to test a vaccine in Africa is testament to this.
This story was completely fake and was picked up and published by mainstream media around the world. Eventually, the facts were checked and found to be false, and media outlets, such as News24, were forced to apologise. Here confirmation bias manifested itself through those that believed Africa is the testing ground of the world and seen as less important.
When it comes to investing, confirmation bias is common when people use phrases such as “I knew we should have had more offshore, look what the Rand exchange rate has done.” This is a comment made in hindsight regarding preconceived ideas about South Africa over a short period. Importantly, investors need to understand the facts of their situation, especially in the context of their plan.
Herd Bias – Wanting to follow the perceived crowd in the decision one makes. Safety in numbers.
Yet another widespread bias we all can fall prey to. Herd bias has been very apparent through this current, as well as previous financial crises, as people hear that they need to have more of their investments in cash. Friends repeat this message around the braai (digital braais we hope!) as does the media. Again, investors need to understand what their position is first and what affect their plan moving their investments into cash would have.
Action Bias – If I take an action of any kind, I will be more in control, and I will then feel less anxious/uncertain.
This is a behavioural bias, but it can also be an overriding bias leading to other biases, such as the two above. We all like to be in control, and when this lack of control becomes front of mind, it drives us to seek action to wrestle some of this control back. Action that is based on emotion nearly always leads to outcomes that haven’t been thought out, and are in contravention to the long term plan we have. That’s not to say that we can’t make calculated changes during times of uncertainty. We can look at the parts of our lives that we have control over, such as our monthly budgets, health and learning.
In all the cases above, it can always help to speak to your RetiremeantTM Specialists and talk through the thoughts/emotions you are experiencing. Does it suit my Financial Plan? How will my investments change if…? The RetiremeantTM Specialists ability to help you stick to your plan and cut out the short -term noise is one of the most valuable roles that they hold.
Chartered Wealth Solutions is an authorised financial services provider
(FSP no. 13909)