The Psychology of Investing: What to do about bias

Surely investing is a logical, business exchange where people make sensible decisions based on rational notions and well considered information? Well yes, in a parallel universe called Robot City where machines rule the universe and people are few and far between. On earth however, we have people; emotional beings with decisions based on ‘why’ rather than ‘what’ and a reality that is strongly influenced when greed or fear comes into play.

Behavioural finance is the study of human behavior in economic climates, with the early work in the 1970’s by researchers Daniel Kahneman and Amos Tversky, earning them a nobel prize for their work on the psychology of investment behaviour

Our brain is possibly the most amazing and complex ‘machine’ on the planet. At any given time, our brain is thought to consume roughly 20% of our total energy expenditure. To navigate through the complexities of our everyday human experiences, we have ‘rules of thumb’, ‘heuristics’ or ‘shortcuts’ to assist us with our decision making. Whilst normally serving us in making us more efficient, these rules of thumbs generally help us. However, when it comes to investing, if you’re not paying attention you can be vulnerable to bias, and as a consequence poor investing behavior.

pastore con gregge di pecore sui monti Sibillini, ItaliaHerding

Investors feel a strong impulse to do what others are doing.  Therefore, people put more money in the top of the market and sell after crashes at the bottom of the market.

In consultation with your financial advisor, have the courage to do the opposite to the majority.

Loss Aversion

We rate loss twice as heavily as our gains. We would far rather a scenario where we win $75 than an instance where we win $100 and then lose $25.

For people who are retired and invested, we rate loss 5 x as heavily as our wins.

This becomes a problem for when an investor starts to experience losses – investors often go to great lengths to avoid losses that can mean staying in an investment for longer than necessary just to avoid the eventual loss – even though often eventually losing more. market.

Have limits around your investments. Make sensible goals around when you will stay in and when you will get out. Have a trusted adviser assist you to set these goals. An adviser can help to offer you objectivity, particularly if you are emotionally tied to an investment.

status quo

Memories are short and so we lose perspective

The Status Quo Bias

People generally have short memories for events. For example, if a stock goes down people tend to behave as if they will continue to decline.

Keep sight of the bigger picture.  Research how the shares have travelled over a much longer time frame.

Financial advisors often say that investors take too narrow a view of the market and don’t commit to the longer term strategy that is needed.

Illusion of Control Bias

In committing to a financial investment, investors will gain greater confidence in their decision and believe with more certainty in their decision than may be warranted. The belief that an investor has more control than they do may result in failing to sell a stock, when such a decision is warranted. The best example can be seen on the craps table at a casino, If people want high numbers, they’ll roll the dice really hard, but when they want lower numbers, they roll them very gently!

Look in the mirror! Acknowledge that you are human and that when you open yourself to the possibility that you may be vulnerable to thinking as others do, you may be more likely to avoid biases rather than experience them!

Male hand rolling five dice on green felt

The illusion of control: rolling soft for low numbers and hard for high!

Our greatest bias?

Interestingly one of the most problematic biases we can suffer is when we assume that a bias is experienced by others – but not ourselves.

Look in the mirror! Acknowledge that you are human and that when you open yourself to the possibility that you may be vulnerable to thinking as others do, you may be more likely to avoid biases rather than experience them!

 

So what can you do to invest without falling into the trap of one or more of the investment biases?  To find out how to invest with the approach of a professional athlete, click here.

Don’t act on NY Resolutions until you’ve read this!

2011-year-resolution-400x400The temptation will be strong over the next week to join in with others and declare your New Years resolutions for 2013.  An admirable gesture for sure, however the reality is that the majority of people leave their resolutions long behind by March.  So how can you be different? What can turn your good intentions into sustainable long-term behaviours?

The truth is that whatever the new behaviour is (eg. Starting to exercise, stop smoking, flossing your teeth) it’s something that you are currently NOT doing as you would wish …. hence the need for the resolution!  So, whatever it is there are reasons you aren’t doing it.  Unless you know what they are and have strategies to overcome them, you are wasting your time declaring your upcoming change.

The well known phrase fail to plan, plan to fail’ is 100% correct.  Most psychologists view behaviour change as occurring through a series of steps or stages.  We may initially be resistant to change, then we contemplate doing things differently and many people make some quick plans and then launch themselves into whatever the new behaviour is.

STOP.

You rushed it and that’s why so often it doesn’t work.  Successful behaviour change comes about when you think and plan, then think some more, and then do some more planning!

Let me illustrate two quick examples of how you can considerably increase your chances of changing your behaviour.  I’ll use examples of both starting a new behaviour and stopping an existing one.

Starting a new behaviour – Going to the gym

Why do I want to start exercising at the gym?

  1. It will improve my cardiovascular fitness and strength
  2. It will help me to lose weight
  3. it will help my confidence?

So why haven’t I been going to the gym?

  1. I haven’t been prioritising it into my weekly schedule.
  2. When I have the opportunity to go, I do something else, for example when the alarm goes off in the morning, I roll over and go back to sleep.
  3. I think about going to the gym and then I tell myself it’s going to be hard, and I will be sore, and I’ll probably make a fool of myself.

What do I need to do differently to overcome these obstacles?

  1. Prioritising – Get out my diary and make an appointment with myself to go to the gym. Decide whether mornings or evenings will suit me and the family better.
  2. Not seizing the opportunity – go anyway! I know I don’t feel like it, but I know it will feel good once I’m done.  I also need to have my clothes out ready to make it easier. So I’ll lay them out the night before for a morning session. Or I’ll put them in a bag in the back of my car in the morning so I can go straight from work.
  3. Negative self-talk – challenge the helpfulness of what I’ve been saying to myself.  “Yes, it will be physically uncomfortable at first and I might be sore, but long term it will be really good for me to go”.  “I might feel self-conscious, but I’m a long way in front of all the people who stayed home in bed!”  “That’s why I’m going to get a trainer to plan out a program for me initially, so I can learn what to do”.

What resources do I need to change my behaviour?

  1. sandshoes,
  2. gym shorts and a tshirt
  3. a gym membership,
  4. access to a personal trainer to design my initial training program.

When will I start?

I’l ring the gym now and schedule to get a program from a trainer.

How will I know when I’m successful?

I’ll be regularly going to the gym 3 times a week and I’ll notice a difference in my appearance and how my body feels.

What if I relapse and stop going?

  1. I’ll first forgive myself!
  2. I’ll then review why I haven’t been going and make plans to overcome those obstacles.

Behaviour 2 – Stop eating high sugar and high fat desserts every night.

Why do I want to stop eating the desserts?

  1. They are calories I don’t really need.
  2. I’ve just started my gym program and this isn’t helping my efforts.
  3. I don’t feel good after I’ve eaten them.

Why do I currently eat desserts every night?

  1. They are in the freezer!
  2. Habit
  3. My partner eats them with me
  4. It’s what I do when I watch tv to relax.

What do I need to do to overcome these obstacles?

  1. In the freezer – throw them out and don’t buy any more!
  2. Habit– Change the habit, think about something I would rather eat instead like a piece of fruit or some yoghurt and have those foods available.  Remember you don’t need to totally abstain!  Perhaps you might have your treat dessert twice a week.  Plan which nights that will be and have that then.  Reducing your intake from 7 nights a week to 2 will make a big difference.
  3. My partner eats them too– talk to your partner about your decision to make a change and see if your partner would like to make the change too.  It will be easier if they do, but if they don’t, make the commitment to do this for yourself.
  4. It’s what I do to relax– Remind yourself why you are making this change.  Enjoy the fruit or whatever alternative you go with.

What resources do I need to change my behaviour?

  1. A dessert alternative

When will I start?  

I’ll go grocery shopping this afternoon and buy some fruit alternatives.  When I get home I’ll throw the old desserts out (or put them to the back of the freezer for my two allocated nights).

How will I know when I am successful?

When I have been regularly eating healthy options for my dessert.

What if I relapse and stop going?

  1. I’ll first forgive myself!
  2. I’ll then review why I haven’t been going and make plans to overcome those obstacles.

SO WHERE DO YOU START?

First I’d like you to copy the questions I have listed below and put them into a word Healthprocessing document.  Take the time to go through the questions and answer them for yourself.  Print the answers off and put them somewhere where you’ll see them and start moving towards change.

  1. Why do I want to stop/start                               ?
  2. Why do I currently                          (insert the current barrier here)?
  3. What do I need to do to overcome these obstacles?
  4. What resources do I need to change my behaviour?
  5. When will I start?  
  6. How will I know when I am successful?
  7. What if I relapse and stop going?

When timing is everything ….

Image

© Maxxyustas | Stock Free Images & Dreamstime Stock Photos

We’ve probably all done it: lain awake at 2am thinking about how we wish we could return to earlier in our day and change something we have done or said.  Or perhaps it is something lying ominously in wait for us in the future that at this moment we cannot control, yet is keeping us from our slumber.  Or maybe we have driven through a set of traffic lights …. And then further down the road wondered whether the lights were green.  Or sat in a meeting with someone only to realize you haven’t been listening for the last 5 minutes and have no idea what they have just said and now they are waiting for you to respond!

A key to us making the most of life’s experiences is to ensure we are in the optimal time orientation.  So what is time orientation?  There are three different passages of time:

Past

Present

Future

 Our past is important as it holds our memory, our history, all of our times – both good and bad.  Who we are today is largely shaped by our experiences and the influences of our past.

The future is important as it where we turn to our hopes and aspirations.  Our goals sit on the horizon giving us reason to make our decisions for today.

The present is right now.  It is where you are as you read this blog, it is what you think about as you read these words.  You may be completely absorbed (I hope so!) or skimming through whilst you think about what you’re cooking for dinner tonight – sorry, now I’ve distracted you!

An important part of the present is that it is the only passage of time where you hold any control.  The ‘now’ is where you behave, feel and live life.  The now is where you can live life in a fulfilling way, if you have ever sat down to eat dinner in front of the tv – I wonder to what extent you actually tasted your food?  Eating is such a sensory experience and to ingest calories without savouring it’s aromas, tastes and textures is to miss many of the psychologically fulfilling aspects of the meal.  In fact the literature on mindful eating and it’s impact on weight is something I will need to address in a future blog.

So the challenge for us all is to be more mindful of our present experiences.  Wonderful or painful, life is lived and experienced most fully in the moment and experience tells me that most people would benefit from directing more of their attention to the moment.

For athletes at training or in competition, being focused in the ‘now’ is what allows you to perform at your best.  If 100kg of opposition is running at you at pace and your attention is on the mistake you made 5 minutes ago (the past) or on where you’ll be going after the game (the future) then you’re not going to maximize your attention for the task at hand (the present).

Of course the past and future are very important in our decision making.  If we are planning a holiday we may reflect back on previous trips to think about what went well in the pastWe should also think ahead to the trip and those things that we need to organize to make the trip go smoothly (such as travel insurance or booking transport). However when we are on the trip, to stay immersed in the moment looking at the scenery or tasting the food or laughing with friends is to live the moment and live life more fully.

If we are playing golf and walking to the tee, we may recall playing that hole last time, the club we used and how we played it (past); we play the shot focusing on what is relevant to the task (body positioning, breathing, swing, contact, follow through) (present); and then as we walk towards our next shot we may plan ahead to how we’re going to get to the green and what club we may use when we’re closer to the green, and how good a cold drink will taste at the 19th hole (future)!

When we are able to match our time orientation to the requirements of our situation we will engage more fully with the task and will be much more likely to optimize our chances of success.

My experience is that most people don’t spend enough time in the present: life passes us by without us experiencing it in its full complexity and beauty.  The past has gone, the future will come, but for now live in the moment and experience the benefits.

In my next blog I will offer some strategies for you to stay in the present.

The psychological benefits of breakfast

This post was first written on Inshape News in July 2012.

The nutritional benefits of breakfast in relation to weight loss are well established and I’m sure will be well described by my fellow writers.  It is also important to consider the psychological benefits that can be gained when you sit down in the morning and tuck into a bowl of something healthy.

Consistently, studies demonstrate that memory, creativity, processing and other brain functioning are all enhanced following consumption of breakfast. Further, your morning meal can boost your energy levels and leave you feeling more alert and ready for your day.

One advantage of regularly eating breakfast is the discipline activated and required to maintain the routine. Self-discipline (or self-regulation) is the process of consciously managing your health. Whilst challenging for many, the decision to make proactive steps towards your health will have far reaching benefits. When we self-regulate we are likely to feel more in control of ourselves, and our tendency for impulsive behaviour decreases.

People who self-regulate are able to plan and set goals, reflect on their own behaviour and organize themselves appropriately. Other things we know about those who self-regulate are that they are more likely to seek out information and advice, will try harder and persevere for longer. These qualities are beneficial in all aspects of our health and well-being. So the habit of eating breakfast will provide more than just nutrition for your body and have an impact on your metabolic rate. Eating breakfast will set you up to increase the likelihood of making better health choices through the rest of your day – impacting on your long-term weight and health.

Self-regulating to ensure you eat breakfast is made easier with some planning and organization, however it is worth the effort. Also make sure you add some variety. Perhaps have a few cereals to choose from or cook some eggs in different ways. Creativity in our lives is helpful for our motivation levels. Ultimately, treat self-regulation like a muscle — the more you work it the stronger it gets. Self-regulation gets easier with time and its benefits to your waistline will be worth it.

Embracing adversity … the good side to when things go wrong!

Ancient Greek, Epictetus wisely said:

It’s not what happens to you, but how you react that matters

The flip side of the joy of life is that we at times face challenges and hardship.  Whilst we look for the silver linings, we unfortunately also need some days to look into the clouds.  Much of this is unfortunately beyond our control – a factor that for many of us becomes very disconcerting.  However there is an upside to adversity and knowing how to grow and develop beyond these challenges is where we can find the silver lining.

A few things to think about next time you face adversity.

Adversity is a reminder

I don’t meet too many people who tell me that they struggle from not being busy enough!  So when adversity comes along (illness, loss, disappointment) we can be forced to take stock of the things that are important to us: our friends, our family and our health.  Consistently the research tells us that ‘stuff’ (possessions, fame, and money) are not the things that bring us happiness.  When adversity pulls us up we have a chance to stop and reflect on what is important and where our priorities best lie.

Adversity provides guidance

Maybe the time has come to change your path?  Perhaps the challenge that you face is life telling you that you now need to think about doing things differently.  Maybe there is something that you can change.  Change, when it is done well requires knowing what decision to make and careful planning.  Take care to listen to your instinct, it is often a wise place to start.

Adversity makes us stronger

Whilst it may not feel it at the time, the only time we learn anything is when we make mistakes and are open to learning.  Most would prefer to experience success, however it is from our disappointments that we can dust ourselves off, reassess what we were doing (that didn’t work) and adjust for the future.  I have recently had interesting discussions with parents of successful athletes who have hit stumbling blocks when their child has experienced their first ‘failure’ and really not had the strategies to cope with it.  The advantage to not coming first every time, or not getting selected in the team is that it forces you to reconsider and grow.  We learn a great deal from when it doesn’t go the way we plan.  The important questions to ask ourselves are:

  1. Why might this have happened?
  2. What was my contribution?
  3. What did others do?
  4. Was it in or out of my control?
  5. What could I do differently next time?
  6. How am I better for the experience?

In fairness, sometimes depending upon the adversity it may be some time before we are ready to face such questions, however given none of us own a time machine (although I do put it on my wishlist to Santa every year!) all we have to go with is what we can control and how we can move forward.

I’d prefer the good times too, however I know that when adversity strikes at the very least I can learn from the experience and that can only benefit in the future.

Mental strength and weight loss

This post was first written on Inshape News in June 2012.

Whilst losing and maintaining weight loss requires physical actions (what you choose to eat, whether or not you exercise), much of your success of comes down to overcoming the associated mental challenges (feeling tired, losing motivation or losing confidence).

There are five key areas you can focus on that will greatly enhance your chances of success in being the person you want to be and achieving your goals.

Set Goals – If you don’t know where you are going, how will you know when you get there?  Research consistently shows that goal setting is a key component of success.  Begin with the end in mind. Ask yourself, “What would you like to achieve in ‘x’ months time?”  Once you know this, then you can ask yourself, “What can you do TODAY to contribute towards the final goal?”  Remember that small and regular steps are the key to achieving your goals.

Be Positive – How you talk to yourself is ‘crucial’ in determining whether you make positive decisions.  Our brain is specifically designed to offer us a constant stream of thoughts.  Over time and through habit, we determine whether these thoughts are optimistic and helpful or pessimistic and unhelpful.  Optimism has been repeatedly shown to be a determining factor for success.  So you could ask yourself, “Would I ever speak to someone else, the way I speak to myself?”  If, like many people the answer for you is NO, then work towards changing your thinking.  If your thinking is negative, challenge yourself – is what you’re saying even true?  Are you catastrophising?  Will the thing that’s worrying you even be an issue next week?  Next month?  Next year?  Replace pessimistic unhelpful thoughts with those that will move you forward in your goals.

Take …… And replace it with ……
“I ate junk food for lunch. I’m never   going to get on top of this. I’m hopeless.” “I ate junk food for lunch. Oh well, it   was just today and tomorrow I will have a chance to have something healthier   that I’ll enjoy.”
“I’ve only lost 330g this week. This is   too slow. I’m never going to get there.” “I didn’t lose a lot of weight this week,   but I didn’t gain any either!  Slow and   steady wins the race. It will be worth it in the end.”

Be Resilient – Challenges will come along. You’ll miss an exercise session or you’ll eat something unplanned that you wish you hadn’t.  Remind yourself it’s okay.  It’s not the challenges in life that we experience, but rather, how we respond to these and deal with them.  Chin up and face the world – you will be okay and you can survive whatever you face.  The sooner you can bounce back, the sooner you can make more positive steps to enhance your well-being.

Be Creative – Novelty is a great way to spark our interest and keep us motivated.  Perhaps there is a new healthy dish you could try or you could change the location of your regular walk?  Routine is important, however sprinkling in some creativity every now and again stops us from becoming stagnant and gives us a reason to move forward.

Know Your Recipe – Not just for the foods you eat, but for the life you want to live!  We all have things that when we do them regularly greatly increases our chance of success.  The more mindful you are of what helps you to stay healthy and make great choices, the more likely you will continue to do them.  So, if you know that staying hydrated, going to be before 10pm, putting your exercise clothes out before you go to bed, taking a container of almonds to work to snack on are all things that help you to make positive choices, then include these in your recipe.  Your recipe for success that is.

Maintaining a healthy weight is a work in progress for many people, for all of their lives.  Approaching it optimistically, with a plan, being able to bounce back when something goes wrong, including novelty and knowing what you do that makes a difference are all key factors is maintaining your mental strength.

Hmmm, whether to turn left or right?

In 1998 I watched the movie ‘Sliding doors’ and it’s underlying question has remained with me: how different might your life be dependent upon even the small decisions you make?

The movie follows lead character Gwyneth Paltrow’s life according to whether she does or doesn’t catch the train home after being unfairly sacked from her job. The movie shows in parallel the very different lives that would follow based upon that one small event.

Every day we are faced with hundreds of decisions: from what to have for breakfast, which route to travel to work, and whether or not to ask for that promotion.  The thought that every fork in the road could lead to very different destinies could feel immobilising as we consider every possibility and outcome.

However there may also be times that by following our usual course of action our routines limit and preclude us from taking a risk with the opportunity in front of us.

The truth is that without a crystal ball we can never be 100% confident of the consequences of our decisions or how another decision may have turned out. So the lesson then is to move forward with confidence, knowing that at the time of our decision we did the best we could with the information and options we had in front of us.

When making a decision these general guidelines may be helpful:

1. List your options.  Very few situations have only one possibility – brainstorm all the possibilities, even the seemingly unrealistic or ‘silly’ ones.

2. Consider the advantages and disadvantages of the options – what will be the likely outcomes? what is the ‘cost’ to you and others of the action? which outcome is likely to receive the most resistance?  why? and how could you overcome it?

3. Visualise the outcome.  Take the options you have considered and see in your mind what that decision may look like.  Consider that decision in future terms – how may you feel down the track if that was the decision you made?

4. Listen to yourself.  So often people tell me of times when they didn’t listen to their ‘gut reaction’ and regret their decision.  Whilst intuition isn’t always right for us, it is certainly can be a good starting point.

5. Implement your decision.  Here’s your opportunity to take action.  With energy and enthusiasm, take action on your decision.  Be committed to the choice you have made.

6. Evaluate your decision. This is your opportunity for learning and growth.  Was the outcome what you expected?  Would you do anything differently next time?  What would you do next time?

Clinical experience tells me that time spent in the past, in the land of regret and ‘what if’ only facilitates guilt, disappointment and depression.  You made a decision and whether or not you achieved what you hoped for, the question is: what are you going to do now? All you control is in the present.  The past is for our memories and the future is for our aspirations.

The wonder of life is that it is filled with opportunities and decisions to be made.  The doors will continue to ‘slide’, the journey is deciding which ones you will step through.