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.

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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?

As Alfred said to young Master Bruce Wayne, “Why do we fall?” To which Bruce replied, “So we can learn to pick ourselves up.”

A recent discussion with friends raised the question as to whether the current generation of children are over protected by their Gen X parents? The criticism being that in protecting children from failure and praising them for every action (deserved or not) they are in fact making them ill-equipped for later in life when the reality of the ‘real world’ kicks in.  Parenting effectively can certainly feel something of a balancing act that we don’t always get right.  There is no doubt that the intentions of most parents are to give their children opportunities to experience life in a positive, rewarding and enriching way, we do need to be careful however that our intentions don’t in fact harm our children in the short and long term.

There are two parenting styles that don’t do our children (or their parents) any favors:
The helicopter parent – hovers on the periphery of their child’s activities and at the slightest hint of disappointment or disapproval being directed their way, the parent swoops in and attempts to rectify the situation. This may include telling the child they were wronged (“the judge is hopeless, you were clearly the best”); manipulating behind the scenes (organizing for the child to get another opportunity when that is outside the scope of the rules or Imagewhat is fair); or giving the child feedback that is positive, yet unwarranted or undeserved.
The lawn mower parent – spends their time smoothing the path of life for the child, pre-empting what may go wrong and fixing it long before the child comes anywhere near it.  Such as speaking up for the child (for example to a teacher), when the child really needs to take that responsibility.  Often the child will be ‘protected’ without even knowing what has happened in the background.

So if these are the approaches in parenting that we need to avoid, what is the preferred way for us to speak to our children?

The way we understand and subsequently explain our world is known as our causal attributions.  It is these attributions that result in an emotional response and drives our subsequent behaviour.  Broadly, the explanations of our behaviour will fall into one of four categories: ability, effort, task difficulty and luck.

Ability is a characteristic that can certainly change, but may do so at a relatively slow pace.    The difficulty of a task will vary according to who we compete with and the situations we are placed in. And luck, even when considered the combination of preparation meeting opportunity, is at times exactly that, luck.

What then of effort?  Well effort is within our control.  We decide the intensity with which we engage with an activity.  We decide whether our effort will be high or low.  And in a world where people frequently struggle when life feels out of control and unpredictable, effort is our best shot at feeling like we are making a difference.

So when offering feedback and encouragement to our children, this distinction is important to remember.  Our children can not on any given day do too much to drastically change their ability, they can however completely control their level of effort.  So with your feedback, encourage and recognize effort over ability.  Certainly it is a great moment when children demonstrate success and mastery within their sport or academic endeavors; however self-esteem is best encouraged and enhanced when effort is acknowledged.

The important point to remember in setting goals, and setting out to achieve, and trialling new things is that with that effort invariably comes some level of disappointment.  Whilst many would react to using the term ‘failure’, the reality is that not achieving our intended goal can bring about some level of disappointment.  And in building our resilience, this is the most important part!  When we fall down, when we ‘fail’ we have an incredible opportunity to reflect on why it didn’t work and what we can do to be more successful next time.  As parents our role is usually not to make it all better and make the hurt go away, but rather to be the soft place to land so that our children can dust themselves off and have another go.  We only learn from our mistakes and if we deprive our children from this opportunity, we are not helping them in the long term.

The evidence is clear that in the long term, a healthy self-esteem facilitates performance.  So encourage your children to give their all, to strive for their personal best and let them make mistakes.  Through their best efforts, this is their best opportunity.

When silver isn’t good enough ……

Image

I have been interested over the previous week to see the media reaction to Australia’s apparent ‘disappointing’ performances thus far at the Olympics. From the 4x100m relay in the swimming, the Opals loss to France in the basketball and through swimmer Emily Seebohm’s tears that she hoped her silver medal hadn’t ‘disappointed’ the country.

The challenge and expectations placed upon our Olympic athletes are enormous.  The reality is that for the approximately 10,500 athletes competing in London there are a total of 906 medals on offer.  The figures determining any individual’s likelihood of success are staggering.  With approximately 6.675 billion people in the world, the odds of being an Olympic athlete are 1:636,000 and the chances of gaining an Olympic gold is 1:22,000,000.

Our Olympic athletes devote years of their lives, often on meager wages (or the generosity of their families) to live the olympic dream.  Whilst we encourage our athletes to live ‘balanced lives’, the reality is that 4+ hours of daily training + rehabilitation commitments such as physiotherapy, massage, doctors, psychologists, dietitians + meetings with coaches and commitments with sponsors leaves very little room for work, family and relaxation.  The notion of the elite athlete having a balanced life is for most a myth.

Australians love their sport.  Of this, there is no doubt.  Our athletes are lauded as heroes in ways that our scientists, academics, and cultural elite can only dream.  In elevating our athletes to such a high pedestal, the fall when it comes can be hard.

Any wonder then that within seconds of finishing their Olympic event, attaining a result that does not meet their expectations and with cameras and most of the world watching, that some of our athletes react in ways that perhaps even they can’t anticipate?

Athletes are encouraged from very early days to focus not on the result but rather their performance in relation to their own standard (their personal best).  We have little to no control over the behaviour of our competitors, however when it comes to our personal effort we can very much control our destiny.  We should remember that for some the disappointment experienced with a lower than expected medal or placing, may be as much about not attaining their PB.

To experience disappointment often elicits a grief response. Grief is tough enough when experienced in the privacy of our own homes, let alone in the public pressure-cooker that is the Olympic stage.  When a young 20-something has spent more than half their life training for a single opportunity, why should we be surprised when they become human on our screens and react with emotion?  Emotions are an integral part of what differentiates us from other species and our experiences (good and bad) provide our opportunity for learning and growth.

The journey to the Olympics is a long road with many potential highs and lows.  The odds of getting there are small and all that do (regardless of their performance outcome) are heroes for their courage and tenacity.

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.

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.

Achieving those new year resolutions (in June)!

Around December 28 each year I receive phone calls from journalists seeking comments regarding New Years Eve.  In particular, New Years Resolutions and why we are not successful in keeping them!  Each year my answer is the same, most people don’t spend enough time planning for the changes they intend to make.

Behaviour change can be tricky – it isn’t just a case of deciding you’d like to start something new or tweak something you’ve been doing and then it just happening.  The reality is that for behaviour change to stick it requires thought and planning.

You want to start or change the way you currently do something, perhaps you want to start exercising or improve your food choices.  Your first consideration needs to be:  Why haven’t I been doing that behaviour prior to now?  The answers are crucial, because in part they will help you to understand your barriers to change.

When we know our barriers to change, we can plan ways in which we will overcome them.  Consider the barriers below and some possible solutions.

Barrier Solution
I don’t like exercising in the mornings Exercise in the afternoons or evening
The morning is the only time I have to exercise, and I don’t like exercising in the mornings – it’s hard to get up! Lay your clothes out the night before.  Set the alarm and remind yourself that once your feet touch the floor, the hardest part is done!
I don’t know what exercises I should do, I’m not even sure where to start See a qualified professional and have them design and teach you an exercise regime that will work for you
I’m not ready to start exercising, but I want to some day. Perhaps start by increasing your incidental exercise – park further away at the shopping centre, hop off the bus one stop earlier, take the stairs rather than the lift or escalator.
I feel tired and sluggish in the afternoons and a chocolate bar always makes me feel better. The sugar hit from the chocolate bar will be short lived – perhaps take some nuts or fruit or a yoghurt to work ready for your afternoon snack.
Once I start a packet of biscuits, I can’t stop If you’re going to have a biscuit, take what you want to have out of the packet and put the remainder away in a slightly inconvenient spot – the harder you have to work to get to it, the more time you have to think about it and may change your mind.

Do you make new year resolutions in 2011?  I wonder what you were determined to do 6 months ago?  Did you do it – for a while?  Are you still doing it?  The more time you can spend planning for how to make change work, the more likely you’ll achieve your goal.

And of course the good news is that change can start as soon as you’re ready … no need to wait until December 31 to start planning!

Next week we’ll discuss the language around change.  With a few simple phrases you can significantly increase the chances that you will make those changes.