Know Your Behavioural Biases: Fear Bias
The human psyche is full of little quirks – strange behaviours that we can’t always account for and in some cases we aren’t even aware of. They’re not just nature’s little jokes though, very often we display hard-wired behaviours that evolution has put in place for good reason, to help us out of situations that we wouldn’t consciously react to quickly enough.
The problem is that our modern lifestyles have outpaced evolution and in some modern situations, these age-old ways of reacting to stimuli can be unhelpful – a dry throat when you’re addressing a room for example, or feeling nauseous on a long car journey. In other situations, particularly where your money is concerned, they can be downright dangerous.
Among these reactions are what we call ‘behavioural biases’, the filters our brain uses to make sense of the world. From an investment point of view, you need to be aware of their effects and in this series, we’ll explore each one individually.
Behavioural Bias Number 5 – Fear
Unless you’re Bear Grylls, it’s a pretty safe bet that you know what fear is. At some point you’ll have experienced being afraid, whether it’s of clowns, heights, spiders or the tax office.
However, it may be less obvious how fear actually works. As Jason Zweig describes in Your Money & Your Brain, if your brain perceives a threat, it produces chemicals like corticosterone that “flood your body with fear signals before you are consciously aware of being afraid.”
Some people suggest this isn’t really ‘fear’, since you don’t have time to think before you act. Call it what you will, this bias can heavily influence your next moves – for better or worse.
Of course, there are times when you probably should be afraid, with no time for studious reflection about a life-saving act. If you’re reading this today, it strongly suggests you and your ancestors have made good use of these sorts of survival instincts many times over. Fear, after all, is a series of mental and bodily changes designed to propel you away from your current situation as quickly as possible.
When is it harmful?
This theme will come up again across our series, but investment isn’t like everyday life. Zweig and others have described how our brains reacting to a plummeting market in the same way they respond to a physical threat like a rattlesnake isn’t helpful. While you may be well served to leap before you look at a snake, doing the same with your investments can bite you. As we’ve said before, investing is a long-term pursuit and being able to face down fear is as important as being able to resist pointless meddling.
It’s also important to know that our fear, financially, can be misplaced in two ways – first, we tend to overcompensate for the big, obvious and memorable risks (like a flash crash). We can allow fear to put us off certain avenues of investment because of a statistically rare occurrence. At the same time, we don’t fear enough the more subtle threats that can be just as harmful and much easier to prevent, like inflation, which can erode your spending power over time.
Being clear about your goals, your strategy to reach them and the importance of sticking to a plan are fundamentals of successful investing. With an experienced professional planner in your corner, someone who’s seen off fear many times, it’s easier to get an accurate take on when to move and when to stand your ground.
If you’re not scared off, next week we’ll look at Framing.
Keep bias at bay
It’s surprising how hard it can be to simply let things be. Knowing why we react in the ways we do is the first step to avoiding the counterintuitive actions that can damage what we set out to achieve with our investments.
You can download Making Better Decisions: Know Your Behavioural Biases in full today.
If you’d rather read the report in bite-sized chunks, we’ll be posting the lowdown on each type of bias, how it works and why it’s dangerous on our blog in the coming weeks, or you can opt in to email updates.
Co-Founder & Director
Metis Ireland Financial Planning Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland.
All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified independent financial adviser before entering any financial contract. Metis Ireland Financial Planning Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts