The Biased Investor (Part 1)

Are you biased?

Which orange dot is bigger? Ebbinghaus Illusion. Source: Wikipedia

No one wants to be, but we all are. There are systematic ways that everyone looks at their experiences, information, and lives. These biases are hard-wired into us—some of them are part of every living thing. Some years ago a prominent psychologist used the phrase, “preferences need no inferences” to describe how chicks that hatch from eggs exposed to certain types of music continue prefer that kind of music as adult chickens. We’ll get to that later, but his experiment shows that choices can be formed independent of any rational thought process.

Our biases don’t just affect the way that we look at the world. They influence what we choose to look at in the first place. In many ways, our biases are like a language: they give us the categories we use to classify things. Eskimos famously have 50 words for snow; Bedouins have over 100 words for camels or the parts of a camel.

Source: Arabglot

Biased judgements are a typical—and systematic—investment error. Other errors include overconfidence, loss aversion, and herd mentality. The bad news is, these mistakes—if uncorrected—push to do the wrong thing at just the wrong time. They rob us of the returns we need to meet our investment goals—saving for college, or for retirement, or to create a legacy.

The good news is we can compensate for them. If everyone is making the same mistakes and we know the kinds of mistakes our genes and our conditioning and our social nature make us susceptible to, we can look out for these errors. That doesn’t mean it will be easy. But it does mean we can say to ourselves: “Aha! This is a situation where the herd is running. I’d better double-check my accounting/math/what-if analysis.”

Shakespeare once wrote, “The wish is father to the thought.” Because we want something to be so, we act as if it’s already true. But reality bites. And if we can name our biases ahead of time, we just might avoid a few potholes along our investing journey.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:21:56+00:00 June 1st, 2016|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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