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Know Your Behavioural Biases: Greed Bias

by | May 7, 2019 | AHEAD OF THE CURVE |

As Pulitzer Prize-winning journalist Mary Schmich famously said, “Whatever you do, don’t congratulate yourself too much, or berate yourself either. Your choices are half chance. So are everybody else’s.”

It’s good advice, but it’s only part of the picture. Your choices are indeed part chance (and part reasoned, strategic thinking) but unfortunately they’re also partly the result of a series of evolutionary shortcuts and inherited behaviours. We can group these together as behavioural ‘biases’ and without you knowing, they’re acting on decision-making processes and can nudge you in one direction or the other.

Sometimes that’s helpful, but sometimes it isn’t. Knowing about behaviours you didn’t realise were going on might not prevent them, but it’ll make you aware of them. In this series we’re exploring each bias, what it is, how it works and why you need to get wise to it.

Behavioural Bias Number 7 – Greed

Back in the 1980s greed was good – or so the movers and shakers felt after hearing it in Oliver Stone’s Oscar-winning Wall Street, based on the notorious real-life trader Ivan Boesky.

To give him the benefit of the doubt, what the film’s protagonist Gordon Gekko actually said was, “Greed, for lack of a better word, is good. Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind.”

Context is always important and there are definitely times when a little greed – well, let’s say ‘ambition’ – can inspire greater achievements. We all have our financial goals and we all want to achieve the best returns we can get.

When is it harmful?

If you read our recent article on Fear, then Greed is a close cousin. There’s a popular Wall Street maxim that says fear and greed rule the market. After all, they’re two of the oldest instincts – fear gets you away from danger quickly, while greed helps you to fill your boots when times are good, to ride out the bad times.

But greed as a driver of investment decisions is, more often than not, a bad thing. When we start chasing too much too quickly – and straying from our investment strategy – that’s plain old greed coming into play. What’s worse is that if we happen to get a taste of success, it can give us false confidence in our ability to ‘beat the market’, leading to silly decisions, disproportionate risks and spotting ‘opportunities’ that aren’t really there.

In our cut-throat markets, where you’re up against the Boeskys of the world, greed and fear become a two-sided coin that you flip at your own peril. Heads or tails, both are accompanied by chemical responses to stimuli we’re unaware of and have no control over.

Overindulging in either extreme leads to unnecessary trading at inopportune times. Chasing hot stocks, sectors or markets, hoping to score larger-than-life returns, will mathematically, only work some of the time. When it doesn’t work it can be costly and psychologically damaging, yet we tend to ignore these oversized risks.

Greed is really one and the same as temptation, what we want to hit home is that whether or not fear and greed run Wall Street, they shouldn’t run your investment approach. Having the discipline to stick to your strategy over the long term will pay off, as long as it’s a well-thought out plan, put together with experienced professionals to meet your specific goals.

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.

Carl Widger
Co-Founder & Director
Email: cwidger@metisireland.ie

Disclaimer

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