Hello,

There are a number of well-known behavioural biases in the financial world that have hindered even the most well-equipped investors – and will unfortunately continue to do so. They arise from our innate emotional tendencies, which are so deeply engrained that even the knowledge gathered from half a century’s worth of research into behavioural finance still fails to fully rationalise our decision making. For example, the concept of diversification and its merits are today widely understood, however, many investors still choose to hold heavily concentrated portfolios – oftentimes unwittingly. For example, this is true for those that invest heavily into physical property, rather than a range of asset classes, despite their primary residence being the most valuable asset they own.

 

Another common case is the proclivity of employees to hold onto their equity compensation, which represents familiarity bias. Many employees continue to keep their vested company shares due to a belief that their insight is superior to the markets, and due to their strong conviction in the company’s future. It’s true; knowing a company well is imperative when deciding to own it, and there’s little wrong in believing in the company you work for. However, extreme positions amongst employees are not advisable.  Another common bias, and one that is highly visible now, is that of recency bias. Investors over the last month will have experienced volatile, negative returns in many investment markets. However, this short-term experience should not influence your investment choice. To put it another way: If your personal circumstances haven’t changed in the last six weeks, then why should your fund choice?  

 

As always, if you wish to discuss anything in further detail, please do get in touch.