Biases influence your actions every day, from the side of the bed you wake up on to the TV channel you tune in to for your morning news.
Now, scientists have discovered that humans have an “anticlockwise bias”. As reported by the Guardian, studies show that, whether walking around a museum, supermarket, or an empty room, humans prefer to drift anticlockwise.
It’s a bias that most of us can pass by our entire lives without noticing. As such, this begs the question: what other biases may be impacting your financial plan without you knowing – for better or worse?
Present bias may mean you favour your current needs over future goals
Most of us enjoy spending, whether indulging ourselves or the people we love.
However, when your spending is disproportionate to the amount you are saving, you may be suffering from present bias – the subconscious tendency to prioritise instant gratification over your long-term goals.
While it feels good to spend, devoting less wealth to your future self might leave you with a savings gap once you retire.
Successful financial planning is a delicate balance between providing for your future and tending to your present needs. This means balancing cash savings for your short- and medium-term goals with long-term investments.
We can help you strike this balance using tools like cashflow modelling. This software can show you how much you need to set aside for the future, while also enjoying your wealth in the short term. This allows you to create a budget that offers you freedom now and in the future.
Loss aversion could be limiting the amount of wealth you can grow
When the pain you feel from the prospect of losing money is twice as high as the joy you might feel from gaining it, you could have a loss aversion bias.
This bias can be particularly counterproductive when it comes to investing, as the possibility of losing money can be enough to stop you from investing altogether.
However, investing is an important engine for growth in financial planning, and just because risk is present doesn’t mean you’re guaranteed to lose money.
Certain investment strategies exist to help you mitigate risk:
- A diversified portfolio can help you spread risk across different assets, markets, and locations.
- Maintaining a long-term outlook can reduce the likelihood of an emotional decision, like selling stocks during a market downturn, limiting your long-term growth.
If you’re suffering from a fear of investing, speak to a financial planner to see whether loss aversion might be holding you back.
Optimism bias could leave your plan at risk
It’s good to be optimistic about your wealth and what it might allow you to achieve in the future.
But too much optimism can be a bad thing.
Optimism bias occurs when you believe that more good things will happen to you in your life than bad things.
While we all want this to be true, believing it means you might underprepare for unexpected events and leave yourself vulnerable. For instance, a poor economy might mean you lose your job, or an accident could force you out of work, destabilising your income.
Hoping for the best but preparing for the worst is an important philosophy in financial planning. Ensuring that you have the necessary protection in place, like income protection or an emergency fund, means that you can remain optimistic while benefiting from peace of mind.
Confirmation bias could leave you close-minded to your plan’s potential
Confirmation bias is the unconscious tendency to search for information and interpret it in a way that supports your existing beliefs. To an extreme degree, you may ignore any conflicting statements or evidence, even if it will help you make the best decision for yourself.
For example, you may become excited about the prospect of a new investment opportunity you see on social media. However, your excitement might overshadow any contradictory information about its risks, which could leave you exposed to investment losses or fraud.
Additionally, confirmation bias might mean you are less amenable to new ways of restructuring your finances, even if it could offer you more security and greater opportunity for growth.
Your financial planner can provide you with clear, rational advice that you can trust and that always serves your best interest.
As such, we will make sure you are well informed about any decision that might put your wealth at risk, as well as any opportunity that may make you better off.
We use behavioural coaching to ensure that your biases don’t impact your goals
Financial planners aren’t just responsible for helping you build wealth; we are also sounding boards for any problems or concerns that are weighing on you.
To this effect, we can put any biases you might consciously or unconsciously have into perspective, and offer reassurance so that you can make calm, informed decisions about your wealth.
Learn more about how we can help by getting in touch or emailing us at advice@mlifa.co.uk for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.