Oleg Seydak, CEO at Blackmoon
When it comes to financial investments, most people have the same goal - maximizing the profit. Most of us want to make money, and in this sense, the more, the better.
People employ numerous investment strategies to try and achieve the maximum profit possible from their investments. Unfortunately, these efforts are often counterproductive to the investor’s goal. For instance, people spend hours pouring over market reports, watching for market movements, or following their favorite gurus on social media. They make critical decisions based on this information, and all too frequently, those decisions are to the detriment of the ultimate goal - maximum profit.
Unfortunately, the problem isn’t the information. It’s ourselves.
There are hundreds of cognitive biases that impact people's ability to make the best determination in any given situation – including their investment decisions. As a result of these, investors unwittingly integrate emotion and personal preference into decisions that should be dominated by logic and intentionality.
Bias Impacts Our Financial Decisions
While there are hundreds of biases that affect our decisions, Deloitte identifies three biases that primarily hinder decision making – especially when finances are involved. In a detailed report released in conjunction with The Wall Street Journal, Deloitte recognizes optimism bias, expert bias, and narrow framing as three of the most harmful prejudices afflicting our investment decisions.
Optimism Bias
Optimism is an endearing quality in relationships, but it can be utterly destructive to wise investment decisions. As Deloitte notes, “Optimism, while not categorically bad, is often closely tied to overconfidence.”
In a cited study, CFOs were asked to provide a confidence interval for predetermined stock market index funds. Only 33% of their selections actually performed as expected. The study found that these CFOs were equally as bad at predicting their own company’s market performance.
Most people, even C-suite executives are frequently wrong, but it’s difficult to recognize optimism before it’s too late. In other words, people tend to be unabashedly optimistic until the negative results roll in, which, unfortunately, they frequently do.
Expert Bias
Optimism bias is frequently fueled by expert bias. Investors tend to have a select group of “experts” that they follow and listen to. This closed circuit of advice creates an echo chamber that falsely feeds optimism.
Many experts are really nothing more than pundits, and as the report notes: “Just because someone was the most accurate in the past does not mean we should only rely on his or her opinions going forward.”