Why Your Bias Can Make You Make Bad Investment Decisions

We all have read about confirmation bias — the tendency to look for information that confirms a pre-existing belief and how that bias may lead us to make bad investment decisions such as holding a stock when we should sell it. There was a great Harvard Business Review article called “The Hidden Traps Of Decision Making” which discussed this kind of tendency called the ‘Evidence Confirming Trap’. Over the many years of personal investing, I’ve come up with four steps to make sure I don’t succumb to confirmation bias.

That “I’ve missed the run” so things will do better attitude

Amidst all the various stories out there, many people have been pleasantly surprised with the market growth here in 2017. If you have been sitting in cash, there are naturally going to be emotions of disappointment from what you have missed out on this year. So instead of looking for real empirical data and evidence, you may convince yourself that it is time to get off the sidelines and next year will be another year of double digit growth. I’ve avoided making these kind of mistakes by examining all the evidence with equal rigor. Is U.S. a better bet than international right now or how will the GOP tax plan impact the markets? Make sure you ask yourself the tough questions and gather all facts possible before making a decision.

That “can’t miss” stock that will make you rich

It’s happened to the best of us, no matter what our education. You are at a dinner party or having a conversation in the kitchen at work when you hear someone say, “I just made 100 percent profit buying ABC stock, and this thing is just taking off.” Irrespective of our intellectual quotient, when we hear of opportunities to make money quickly, it always peaks our interest. After you hear this tip from a person whom you trust and like, you already become biased that this is, of course, a very good idea. I always find someone who I respect and trust whether it is a success person or a trusted advisor to play devil’s advocate before I do anything to argue against the decision I am contemplating. This way I can consider the decision with a more open mind.

The “I’ll hang on to my favorite stock forever” scenario

We don’t realize the power of our own motives, and we aren’t honest with ourselves about our motives. Nobody likes to admit losing money, which is why your friends will always tell you they broke even when they come back from Vegas (Hint: The words “break even” are code for “lost money”). When I’ve made money in a stock, it’s easy to want to hang on to it forever. I must be honest with myself when thinking about dumping a stock I’ve made money in whether I am really gathering information to help figure out the right time to sell the stock, or am I just looking for more articles to read on the internet with data that will support me keeping the stock I like. You always need to have an entry and an exit strategy.

The “I’ll agree” to not argue scenario

We all have a trusted advisor in our lives whether it is a family friend, a boss at work, or a financial advisor you work with on a yearly basis.   After making some mistakes early in my career, I realized the last thing I want surrounding me a yes person. This allows me to avoid the emperor has no clothes situation. If you find that your trusted advisor is always agreeing with you, especially in a situation where you are thinking about pulling your money from a financial institution, then it might be time to find a different financial advisor. I learned that some healthy and heated debate with my trusted advisor has allowed me to make better personal and business decisions over my life.

If you are struggling with how make good quality decisions for your retirement, give me a call or shoot me an e-mail at [email protected] and we can help.

Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder oXYGen Financial, Inc.

Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express.  He is the co-CEO of oXYGen Financial.  You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

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