Inspirational Women 2024 Forum & Leadership Awards • The Four Biases of Investor Behavior
Monthly AIRE Perspectives – November 2024
Dear Friends and Valued Clients,
Please see below for The MAP – Monthly AIRE Perspectives for this month.
The Four Biases of Investor Behavior
Dr. Daniel Crosby, author of several best-selling books, including The Behavioral Investor, recently wrote a short piece on “The Four Pillars of Investor Misbehavior.” In this piece, he discusses some of the behavioral biases and behaviors that can be detrimental to successful investing. Here is his brief summary of the article:
Your body and brain were created to do a great many things with remarkable efficiency; investing is not one of them. In fact, if a demigod, evil genie, or vengeful mariner set out to design the worst investor possible, they would have designed you. The flaws in your design quite naturally lead to quirks in your behavior, and creating a system that accounts for these quirks is a foundational element of any sound investment philosophy. Just as good defense wins championships but the quarterback gets the endorsement deal, risk management drives performance but big returns get all of the press.
A couple years ago, I set out to brainstorm every possible way someone’s behavior could negatively impact investment decision-making, relying heavily on the existing literature. I found over 117 different biases and heuristics that could lead an aspiring investor from making optimal decisions! YIKES! To make this more useful to investors, I looked for common threads among the 117 and found four consistent themes. They are:
Ego risk is made manifest in behaviors that privilege our need for felt personal competency at the expense of clear-eyed decision making. Examples include: choice supportive bias, overconfidence, confirmation bias, endowment effect.
Emotion risk stems from the fact that our perceptions of risk are colored by both our transitory emotional states and our individual propensity toward positivity or negativity. Examples include: empathy gap, negativity effect, optimism bias, ostrich effect.
Attention risk is born of our disposition to evaluate information in relative terms and let salience trump probability when making investment decisions. Examples include: anchoring, availability bias, attention bias, home bias.
Conservation risk is a by-product of our asymmetrical preference for gain relative to loss and the status quo relative to change. Examples include: loss aversion, status quo bias, normalcy bias, zero risk bias.
Click here for the full article.
Investing and Politics
“The impact of the person in the Oval Office may not be as significant as often assumed.”
“Letting political beliefs get in the way of ‘Buy and Hold’ has been extremely costly to investors.”
These lessons and more are provided in the following excellent piece on investing, courtesy of AMG. These slides provide great information on best practices in investing, along with some great data and statistics. Please note that this piece was written before the election and is not meant to be a political article. You can click here for the article.
Once again, we would like to thank you for your trust and loyalty, and look forward to speaking with you in the upcoming month.
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