Investor Bias

Written by: Andrew Briesacher – Wealth Manager

Bias comes into play with any decision made in life. It should come as no surprise that our biases can often affect our emotions when making decisions about money. Even as a wealth manager, I too am no stranger to letting past experiences cloud decision-making for my own portfolio. The important thing is to be aware of these biases and reflect upon how they affect our emotions throughout our lives, but even more specifically, in retirement when it’s time to start taking risk off the table.

Retirees are prone to various biases that can impact their decision-making processes. Here are a few common examples:

1. Confirmation Bias: Many retirees tend to seek out information that confirms their existing beliefs or opinions, while ignoring or undervaluing contradictory information. This is even more common in the present day where we have access to unlimited information through social media, the internet, and an endless news cycle. Retirees tend to skim over contrary information that should be at least entertained or considered when making an investment decision.

2. Overconfidence Bias: Some retirees may overestimate their abilities and knowledge, leading them to take on more risk than they can handle or to trade excessively. A more specific example of this coincides with “Familiarity Bias” where many retirees tend to only want stocks or investments from the industry with which they worked or are most knowledgeable. 

3. Anchoring Bias: It can be tempting for retirees to fixate on specific pieces of information, such as the price at which they purchased a stock.  Many use this information as a reference point for future decisions, even if it’s no longer relevant. This can lead to what’s called a “Sunk Cost Fallacy” where the investor holds on to a stock just to get back to the purchase price.

4. Loss Aversion: Retirees may often feel the pain of losses more strongly than the pleasure of gains, leading them to avoid taking necessary risks due to one bad or misinformed past decision.

5. Herding Behavior: Some retirees may follow the actions of the crowd without fully evaluating the underlying fundamentals, leading to market bubbles or crashes. That being said, the reverse can also be true when investors jump on the bandwagon to sell because “everyone else is doing it!”

6. Recency Bias: Many retirees give more weight to recent events or performance, assuming they will continue into the future, which can lead to overlooking long-term trends or fundamental analysis.

7. Hindsight Bias: Retirees may perceive past events as more predictable than they actually were, leading them to believe they could have foreseen market movements or investment outcomes.

8. Self-Attribution Bias: Some retirees may attribute their successes to skill and their failures to external factors, such as market conditions, rather than acknowledging the role of luck or randomness. You can think of this as a person who goes to the casino every weekend and tells everyone about their “big winnings” but not about the other 10 visits when they lost significantly.

This is certainly not an all-encompassing list.  However, being aware of these biases can help retirees and pre-retirees make more rational decisions and avoid common pitfalls in the market. This knowledge can be especially important in retirement since retirees do not have the time to make up for emotional decisions that can be detrimental to the portfolio. Luckily, at Wheelhouse, we can help you navigate these complexities: finding a balance between the numbers and the emotions that drive your decisions.