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June 14, 2007

Shelley's Teaching Minute - Investing on the Bias

A few weeks ago I wrote about a weird occurrence in our brain called Apophenia. Apophenia is the spontaneous perception of patterns or connections in random or meaningless data.  Well, wouldn’t you just know it – this isn’t the only trick our brains pull on us.  Our brains work in a way that makes it darn difficult to be savvy investors.

I thought we could look at few of the other brain occurrences so you could see how or if your investing is being affected.

In the Snider Investment Method workshop I talk about familiarity bias.  Familiarity bias is the belief that things we know and are comfortable with have more value than the things that we are not familiar with.  Familiarity bias dictates a lot of our choices.  For example, I have used the same brand of toothpaste as long as I can remember.  I wouldn’t dream of trying another brand.  Although the others might be as good, they aren’t my brand.  But familiarity bias is not good for investing.  It is one of the things that lead us to be overly invested in our own company’s stock, and history has proven that can be unwise.

By the way, something very close to familiarity bias is exposure effect.  Just because we are exposed to something, we automatically like it more.  Advertisers love this one.

What about status quo bias?  We don’t want to rock the boat.  Even if what we are doing isn’t serving us in any way, we will keep on doing it because we know it.  It seems better than making a change.  Hmmm – ever wondered why you were stuck in the same old mutual funds?

Did you know that there are times when our brains completely ignore probabilities?  The term for is the “neglect of probability.”  When we are faced with uncertainty, our brains fail to see probabilities and are therefore blind to the most likely outcome of our actions and decisions.  No wonder we trade stocks based on our “gut feelings.”

Something I have dealt with more than a few times in my life is the illusion of control.  I bet I am not alone in this.  How many of us are guilty of believing we can control the outcome of a situation when in all reality we just can’t?  Certainly I can will the price of my stock to go up. I think I can. I think I can.

And maybe the worst is bias blind spot - the inability to perceive our own biases.

Shelley Seagler

Kim Snider Financial Communications makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Diversification does not protect against market losses in a declining market. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk, including possible loss of principal.

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