Investing with insight: How behavioural biases shape your decisions

*This content is brought to you by Moneybetter

Whether you’re already in the investing game, or just starting, it’s a good idea to understand the back-story of how you’re making those five critical investment decisions: why to invest, what to invest in, when is good, where is best, and for how long to hold on. Checking how you personally answer those questions may determine whether you become a Buffett or a bean-counter.  

You can get a general picture of yourself as an investor simply by asking yourself a few vital-statistic-type questions, then a few uncomfortable ones, or by getting help from a professional or good investment platform. Moneybetter™, for example, has built its investment platform on guided architecture and behavioural science, which not only helps you understand investing, but helps you understand yourself—perhaps the mightier of the two forces. 

Behavioral-led risk profiling is laden with terms like risk tolerance, impulse control, emotional behaviour, and biases. Yes, I saw you rolling your eyes there. But these aspects of your character affect the way you make investment decisions, and they are worth understanding, as they will help you chart an investment roadmap. 

Let us delve a little deeper. 

The story of you

Where you are in life, in age, stage, and earning, contributes to your ‘risk ability’ score – your current ability even to consider taking a financial risk. You or your advisor would ask:  How old are you? Are you financially secure, or is income a random event? Do you have assets and investments or own a pallet bed and a dog? Is your debt a small cloud overhead or a nuclear eruption? Why do you want to invest – to buy a real bed or a house for your retirement, grow wealth, or hold value in existing investments?

These answers make up your risk ability, which contributes 70% to your risk profile, a clue as to how important these matters are in determining how much money you must invest, setting your investment objective, how much cashflow you will need, and how long you plan to hold onto the investment before cashing it in.  

You are unique!

The bumper sticker says, ‘Remember… you are unique, just like everyone else’.  So humbling. Never mind, you are indeed special, a blend of individual characteristics that also define the way you make investment decisions.  

Here are the types of questions you need to ask yourself about your character when it comes to investing. Are you a flat-out risk-taker, reasonably sensible, or that unique blend? Under what circumstances will you take risk? Do you act impulsively, or stand back, watch, and wait while your crazy friends leap at those ‘never to be repeated’ opportunities? How do you react to good or bad news, and how do you respond in a crisis? 

For example. You are going on holiday somewhere beautiful and new. You are speeding along, and you pass a sign to ‘AFRICA’S HIGHEST ZIPLINE!!!’. Do you swerve left and fly down there without a second thought, blow half your holiday budget and go zipping? Do you slow down and give your passengers the ‘should we’ evil eye?  Do you stop at the next lay-bye and contemplate all the pros and cons? Or do you pretend you didn’t see that sign and accelerate towards your holiday?  

Test yourself for different risk situations (walking on coals, swimming with sharks, etc.) to get a feeling for what constitutes safe and allowable risk versus unacceptable risk – to you. Ultimately, this will help compile your risk rating, which, together with your impulsivity rating, makes up your ‘risk willingness’ score. This contributes the other 30% to your overall investor risk profile.

Read also: 6 questions to ask when choosing an investment platform

Me, biased?

We love to consider ourselves unbiased, but we collect prejudices like kids collect game cards.  Four of the many prejudices can derail intelligent planning. An anchoring bias shows up if you are fixating on one aspect of an investment, like a hefty dividend, and you don’t read the rest of the stats on it. A self-control bias may pop up when you need instant gratification, and you consider selling an investment to buy a small island in the Indian Ocean. A regret aversion bias is when you do nothing to prevent being involved in a bad action-replay of a historic event, like a sudden significant drop in a share price. Loss aversion bias is when you rush to take a risk to avoid a loss rather than to make a gain. These biases are subtle, but one needs to know them and try to avoid them. 

Life will interfere

The state of the world or home and how you perceive it can also taint your investment decisions. Being mood-aware is a good idea because so many large and small dramas are lining up to make you grumpy. The biggies like war, political skullduggery, illness, death, divorce, or losing your job, can seriously mess with your positivity. A negative frame of mind can cause you to make irrational, impulsive investment decisions.  

On the other hand, there will be those hey-ho happy days when the war ends, a tyrant is toppled, you win a substantial contract, or meet the love of your life – and then, who cares? You may wish to toss some money to the wind, fly to the moon, or sell your conservative shares and invest the lot in crypto. Also, a little irrational and impulsive.   

An investment advisor may suggest you avoid making any decisions on both these types of days and wait for a less exciting day when the sun rises and sets without the state of your world being re-ordered. 

What a day!

And never mind those crises of life, there is also the daily state of mind to factor into one’s investment calendar. These are increasingly anxiety-laden days. After all, we live in a relationship with All Things, including partners, workers, generation XY and Z, in-laws, wasps and stinging nettle. There will always be sunny-personality days and stormy ones.   

Though it seems counter-intuitive, a positive state of mind has been associated with reasonably risky investment behaviour, as there is the hope of adding more emotional reward to the day. On the other hand, a thunderous or anxiety-ridden mood is construed as heightening perceptions of danger and motivating one to avoid risk. Which may be a good thing; at least you don’t make your day any worse. 

But again. You may want to make investment decisions on milder days when your mood is calm and you can think more neutrally.

Navigating your investment journey

It looks like a hefty set of variables weighting your investment decisions. It is a good idea to ‘know oneself’ to navigate. To admit you are a lunatic risk-taker with rollercoaster impulsivity, or alternatively that every opportunity looks like a bad risk, is uncomfortable. But it may help you time your investment decision-making and be more even-keeled in the investment process. Knowledge is power.

Armed with an understanding of your investment needs, your risk capacity, and your character, you can develop an intelligent investment strategy and, over time, coach yourself to either be braver or less impulsive, less or more patient, or to save the adrenalin for outdoor adventures. 

Moneybetter™ is a platform of SCM DMA (Pty) Ltd, FSP No. 40983 and ODP No. 45.