A significant challenge for some investors can be overcoming their own humanity. “The investor’s chief problem—and even his worst enemy—is likely to be himself,” said American economist Benjamin Graham.1 Cognitive biases can potentially play a significant role in investment decision-making. These biases are systematic patterns of deviation from objective judgment, often resulting from mental shortcuts that our brains employ.1
Many scientists agree that the human brain is a standout amongst mammals and is the most cognitively advanced.2 Cerebral cortex accounts for 80 percent of the brain’s mass and it is believed to have more than 100 billion neurons.2
Consider this. The brain has potentially endless capabilities for what it can absorb and understand. In addition, more information, more research, and more knowledge is readily available at the click of a button than ever before. So, why can cognitive dissonance – the state of having inconsistent thoughts, beliefs, or attitudes, especially as relating to behavioral decisions – still pose a threat?
For example, most humans know that the key to weight loss is to eat less and exercise more. However, the Centers for Disease Control and Prevention reports that the US obesity prevalence was 41%, according to the most recent numbers as of 2020.3 Despite widely advertised evidence that obesity-related conditions including heart disease, stroke, type 2 diabetes, and cancer are among the leading causes of preventable, premature death, obesity in the United States continues to rise.2 What we know can be overridden by how we behave and feel.
Cognitive biases can be woven through all aspects of life, including financial decisions. What people know can be overridden by emotion, instinct, and perception. Multiplied by the media’s influence, these can be potentially destructive to the decision-making process impacting long term wealth creation.
“Because humans are hardwired for survival, their natural instincts are driven by emotion,” said Mark Matson, Founder and CEO of Matson Money. “Fear, panic, or greed can cause investors to become an impoverished version of themselves.”
Emotions can have the power to push and pull people irrationally. With market volatility, investors may be prone to experience a roller coaster of feelings. Investors who follow the progress of their portfolio closely may feel distress or anxiety as markets plummet or, contrarily, may be overtaken by thoughts of greed or entitlement as markets climb to new heights. While these emotions can feel justified, their impact can be detrimental to long-term wealth creation.
Instinct and intuition can also be harmful to the long-term success of investors. American businessman and founder of Boston Consulting Group, Bruce Henderson, called intuition, “the subconscious integration of all the experiences, conditioning, and knowledge of a lifetime, including the cultural and emotional biases of that lifetime.”4 The commonly accepted idea to “trust your gut” may hold questionable merit and can be potentially dangerous when applied to decisions around money and investing. Intuition alone may be as likely to lead to success as it can to disaster.
Perception, too, can lead investors astray. A 2022 Gallup poll asked Americans to rate long-term investments based on what they perceived was best between real estate, gold, stocks/mutual funds, savings accounts/CDs and bonds.5 The poll found that the majority of participants believed real estate was the best long-term investment vehicle.5 However, according to data collected by the MSCI All Country World Index from January 2010 through December 2022, stocks outperformed real estate.5 While many factors can influence perception, these particular assumptions may be prejudiced by the emotional toll of watching market volatility.
The media can have a surprising amount of power when it comes to emotions, instincts, and perception. Headlines have become incredibly sensationalized. Today, news stations must fill 24 hours a day with news that outsells their competitors. They can use fear to emotionally arouse and attract viewers. The challenge for investors is to tune out the noise and negativity.
Being conscious of behavioral biases when it comes to your financial future can help reinforce a framework for a prudent long-term investing strategy. At Matson Money, we train and develop investors to follow the science of investing and adhere to empirically tested academic investing principles over a lifetime. “If you build your portfolio to last for 20 years, you don’t have to worry about the next 20 months,” says Matson.
Our investing methodology, the Matson Method, is based on more than 30 years of academic research coupled with a framework of understanding both the mathematical and human behavior dimensions of wealth creation.
With the help of a financial advisor who understands the potential biases investors face, you can become the hero of your own story. Are you prepared to stand up to your own human behavior biases and invest based on science?
Interested in learning more? Connect with an advisor today and join us for a special investor coaching seminar, Dismantling Myths of Investing, to discover how you can defend yourself against investing myths and choose an investing strategy based on academic investing principles instead.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
This content is based on the views of Matson Money, Inc. This content is not to be considered investment advice and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision.
This content includes the opinions, beliefs, or viewpoints of Matson Money. All of Matson Money’s advisory services are marketed almost exclusively by either Solicitors or Co-Advisors. Both Co-Advisors and Solicitors are independent contractors, not employees or agents of Matson.
Other financial organizations may analyze investments and take a different approach to investing than that of Matson Money. All investing involves risks and costs. No investment strategy (including asset allocation and diversification strategies) can ensure peace of mind, guarantee profit, or protect against loss.
1. Brennan, Jack. Why you may be your own worst enemy when investing. Financial Post. Published August 24, 2021. Retrieved 18 July 2023 from https://financialpost.com/investing/why-you-may-be-your-own-worst-enemy-when-investing.
2. Herculano-Houzel, Suzana. The Human Brain in Numbers: A linearly Scaled-up Primate Brane. Publisehd 2009. Retrieved 18 July 2023 from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2776484/.
3. Adult Obesity Facts. Centers for Disease Control and Prevention. Retrieved 30 June 2023 from https://www.cdc.gov/obesity/data/adult.html.
4. Bonabeau, Eric. Don’t Trust Your Gut. Harvard Business Review. Published May 2003. Retrieved 18 July 2023 from https://hbr.org/2003/05/dont-trust-your-gut.
5. Rosen, Andrew. When It Comes To Investing, Perception Is Not Reality. Forbes. Published 22 June 2023. Retrieved July 18, 2023 from https://hbr.org/2003/05/dont-trust-your-gut, https://www.forbes.com/sites/andrewrosen/2023/06/22/when-it-comes-to-investing-perception-is-not-reality/?sh=5f6cface2265.