But here’s the rub – how many investors actually learn from their past mistakes? How many don’t realize that their bad decisions come from ingrained behavioral biases? If you don’t know you have behavioral biases, then keep on keeping on making poor decisions. Because what you don’t know, is what’s hurting you.
Behaviorally Smart investors know their propensity for rushing through their natural behavior when under pressure. They’re keenly aware of their knee-jerk reaction to unsteady markets or the latest, greatest bandwagon opportunity. They know the danger in not taking a breath – to check themselves before they wreck themselves – or seek outside counsel before deciding on a major investment opportunity. Conversely, investors who do not have this insight will continue to get into trouble and make bad decisions.
When investors allow emotions to invade investment decisions, they’re set to fail. However, developing an understanding of how we inherently react to market volatility or investment opportunities will lead to becoming a Behaviorally Smart decision maker.
In his book, Behaviorally Smart Financial Planning, Hugh Massie makes the following observation:
Very often, without a heightened level of personal awareness, investor’s blind-spots can lead to investing behavior that results in sub-par outcomes. He continues by explaining the two levels of distinctive thinking which drive:
How the mind works inherently in its natural state to instinctively make financial decisions based on natural DNA “hard-wiring”. This behavior reflects the automatic biases which consistently reveal themselves throughout life (“System 1″)
How the conscious thinking evolved through circumstances, experiences, education and values situationally influence financial preferences at different times in the course of life. This is learned behavior which generally reveals itself as a result of behavioral management (“System 2″).
Emotion and psychology affect every decision we make and investing is no different. It’s true to say that most investors revel in the process of creating wealth, but pay little or no attention to managing it or themselves. Without understanding behavioral biases, investing becomes a lottery and any gains are held for ransom by the investor’s own ignorance.
Don’t allow blind spots in your own behavior to highjack important decisions you will make in life. Change course by learning about your inherent behavioral biases and how to mitigate their affects on your decision-making capabilities.
It’s not rocket science – just four easy steps:
- Step 1. Make the decision to educate yourself
- Step 2. Use a validated, accurate and trustworthy process such as Financial DNA to uncover your behavioral biases
- Step 3. Select an advisor who not only has your best interests at heart but also has educated themselves about investor DNA and Behavioral Biases. Great advisors examine the reasons behind decisions their clients make.
- Step 4. Always remember your natural, go to’ behavior when markets get rocky (as markets will).
“Invest in as much of yourself as you can, you are your own biggest asset by far.” Warren Buffet
“The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.” Bertrand Russell
Duke University Professor and founder of The Center for Advanced Hindsight behavioral economist Dan Ariely. Predictably, irrational refutes the common assumption that we behave in fundamentally rational ways. Blending everyday experience with groundbreaking research, Ariely explains how expectations, emotions, social norms, and other invisible, seemingly illogical forces skew our reasoning abilities.
“Not only do we make astonishingly simple mistakes every day, but we make the same “types” of mistakes, Ariely discovers. We consistently overpay, underestimate, and procrastinate. We fail to understand the profound effects of our emotions on what we want, and we overvalue what we already own. Yet these misguided behaviors are neither random nor senseless. They’re systematic and predictable–making us “predictably” irrational.”
As investors the financial decisions we make can be both complex and stressful; they can change our financial long term security forever. Their impact can be life changing. This is why self-education and understanding decision-making approaches in terms of why and how we make decisions need to be top priorities.
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