the art of biases
- Becoming wealthy may seem difficult but staying wealthy is much harder. Surprisingly enough, the answers do not lie in any financial equation or theory instead you simply need to look within - the ‘Self’.
- Identifying & overcoming your own blindspots is the key to wealth creation process as they immensely impact your judgements, reasoning, and behaviour. But that’s not all. Becoming aware of your biases may seem enough but staying aware is how you ensure you don’t become susceptible to their influence.
There’re hundreds of biases embedded in cognition but here are a few common and important ones that often coming in the way of wealth creation;
Selection bias
- What it is?
Is a bias when you convince yourself that a rule-based system exist that can multiply your investments. - Blindspot:
The intrinsic feature to any investment i.e. unpredictability. - Investor with this bias:
One who chooses to always base his decisions on predictions. The investor who looks for stocks that can turn multi-baggers or IPO’s with bumper listings, or mutual funds that’ll generate the highest return. - Any or all of this is possible but it’s not possible for it to work each time, every time.
- Hack:
While risk is measurable, uncertainty is not. Certitude is something of a luxury when it comes to investments. Choose probabilities over predictions. Consider diversification - it invariably results in earning an “average return.” It’s not about settling for conservative rather it’s taking measured risk and making room for error (uncertainties).
“Risk is what’s left over when you think you’ve thought of everything – Carl Richards”
Loss Aversion/Negativity bias
- What it is?
Is when you tend to avoid loss over maximizing gains or act on pessimistic prediction more diligently than optimistic ones or when losses are felt much more than the gains. The negativity bias manifests in many forms. Simply put, it reflects behavioural tendencies that unjustifiably leans more towards negativity – be it perception or prediction, feedback, or feelings. - Blindspot:
It clouds your judgement and fails to look at things objectively & in entirety. There’s a difference to real risks and perceived problems. - Investor with this bias:
One who prefers to play it safe with money and chooses safer haven (FD’s, RD’s, Bonds) for investments. The aversion to risk shields the capital from immediate threats but it comes at the cost of compromising the future with reduced wealth (thanks to inflation). - Hack:
Don’t let emotions cloud your judgement. Look at the big picture and take a systematic & structural approach. Be open to the idea of facing challenges and you’ll be able to embrace them as opportunities.
“What you see is not all there is – Daniel Kahneman”
Survivorship bias
- What it is?
Something that occurs while analysing data samples. You overestimate the success rates of outcomes and ignore those that’ve failed. Put differently, you don’t take into consideration the full sample size while making a judgement call. - Blindspot:
By taking only the positive data or successful cases you ignore failures, overstate things and lean towards extremes. - Investor with this bias:
Someone who gets easily charged by epic success stories of start-up’s turning unicorns, heap praises on the ones that’ve made it big and draw conclusions about high success rates of such endeavours while totally ignoring countless failures and crumbled dreams. - Hack:
Keep it real. Appreciate the role of luck as much as you draw your attention to risk. Concentration and diversification are two different mindsets while investing. Often, the forgotten stories make for valuable investing lessons and it rightly deserves your attention.
“The eye sees only what the mind is prepared to comprehend – Robertson Davies”
Endowment bias
- What it is?
When you overvalue assets or investments that you already own simply because you own them. - Blindspot:
Failure to objectively assess the true value and potential of the asset that you own mostly owing to emotional roadblocks. - Investor with this bias:
Discounts the advice to give up his three-bedroom flat in an overcrowded suburb only because it was his first dream purchase and so harbours hope that he could sell it for a potentially better price in the future that he thinks will outdo the 2/3rd of the paycheck he’s lost to bank as interest. - Hack:
Don’t be beholden to your investments and live in false hope. Cut losses when you think you’ve made a mistake or when things don’t go as planned. Take deliberate steps to exit instead of staying put. You stand to lose a lot more when you put good money to chase the bad. Emotional attachment can lead to missed opportunities of better alternatives.
“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change – Charles Darwin”
Motivation/Incentive-caused bias
- What it is?
A tendency to interpret information or make decisions in a way that aligns with your personal interest or desired outcomes. - Blindspot:
Lack of realization that your judgement is swayed by the desire to gain a reward or avoid a negative consequence. - Investor with this bias:
Delays investments in favour of immediate gratifications. Gambles with money to make a quick buck. Takes a shot on investments that he doesn’t completely comprehend. - Hack:
You can neither spend without guilt nor save without sacrifice. Rein in your impulses and develop the practice to question the rationality of your choices. Be sensible in your decision making and follow basic ethics.
“It is difficult to get a man to understand something when his salary depends on his not understanding it – Upton Sinclair”
Recency bias
- What it is?
Predisposed to weigh recent events more heavily than older or less recent events regardless of their actual significance or frequency. - Blindspot:
Your disregard to valuable historical data and long-term trends not to mention the negligence of important patterns and insights from the past. - Investor with this bias:
chases investments based on the performance of immediate past from crypto to stocks, mutual funds to gold or the ones who go looking for insurance hearing about a dear one’s untimely death or at the onset of a global pandemic. - Hack:
Avoid building a tunnel vision focused on short-term fluctuations instead consider the potential consequences of neglecting long-term prospectives.
“The biggest risk is not the volatility in prices, but the risk that you will react to volatility like everyone else – Howard Marks”
As your guides we don’t attempt to change your money personality. We realize these blindspots do not easily go away. Instead, we spot the biases as they kick in and help you with ways to work around them. The idea is to get you to adopt strategic solutions once you’ve been able to carefully identify, consider, and question your own thoughts and beliefs.