Updated: Jan 11
So if you've been reading us for a while, you're quite familiar with how psychology can affect our decision making skills. But who says that we can't overcome these challenges?
First Relationship Gone Wrong?
While it is not guaranteed that you can forever avoid the influence of biases whether they be cognitive or emotional, you can absolutely minimize the influence that they have.
It’s similar to wanting to forget that horrible first kiss or your first relationship gone wrong. As much as you want to or try to destroy that memory, you know it will always be there. If you're anything like Spongebob and Patrick, we all tend to bury those memories. The same applies to biases and emotions.
With cognitive biases, our decision-making is already based on a prior number that we come to consider as a reference point. This established number may or may not be accurate, which can cause someone to make a decision that interferes with their financial goals, or sets them back.
Emotional biases are considered to be harder to overcome than cognitive biases simply because humans are emotional and it is ingrained in our brains to have them. There are also five common irrational mistakes that you may make unconsciously while investing.
How Can I Reduce the Impact of Such Biases?
One way is to focus on the process and what is in the present. By not dwelling on the past, you are placing less of an emphasis on irrelevant information that may no longer have anything to do with the present decision at hands. Thus, you are also avoiding biases such as anchoring.
Another way to minimize the impact of biases is to prepare and plan. Although the phrase of “buying low and selling high” might seem logical, doing the opposite may actually reap in greater profits. Warren Buffet is infamous for buying when others are fearful of buying and selling when people are confident in the market again. As he likes to say, “Risk comes from not knowing what you’re doing”.
Speaking of finance quotes, what are your favorites? Drop them down below!