Know Your Behavioural Biases: A Series

In January 2019 an investment pioneer passed away.

Whether the name Jack Bogle is familiar to you or not, he left behind a legacy that benefitted millions and a philosophy that continues to be a source of inspiration (and good investment sense).

What did he do?

In a nutshell, Jack Bogle was the man behind the first index fund designed for ordinary investors. Bogle felt that everyday people should, and could, benefit from the stock market. He believed stock pickers make below average returns and he rejected the idea that they have any claim to doing a better job, or getting better results than simply investing and allowing the maths to do its thing.

Bogle, like Warren Buffett, believed that a fund should mimic the performance of an index with the goal of getting higher returns for lower costs in the long run, instead of trying to beat the markets. In fact, such was Buffett’s agreement and admiration that when Jack Bogle died, he had this to say:

“If a statue is ever erected to honour the person who has done the most for American investors, the hands down choice should be Jack Bogle… he helped millions of investors realise far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.”

Bogle built an investment revolution that changed the industry and improved the financial wellbeing of millions, all with a simple philosophy that can be boiled down to “stick with the plan.”

#StickWithThePlan – got it.

Sadly, it’s not that simple – for the mathematics it is, but for human beings, not so much. In an ideal world, given clear examples of others who have shown the benefits of setting a plan and sticking to it, we’d be able to do just that.

But we’re a little more complicated than that – often, to our own disadvantage, two key words get in the way of this apparently simple sequence of events. Those words are ‘emotion’ and ‘bias’ – they’re entwined, interlinked, they feed one another. Bias causes us to view things in irrational ways and leads to decisions based on emotion, which in finance and investment is never a good thing. Those emotional decisions generally end badly, and that just hardens our bias further.

One of Buffett’s most quoted ideas urges investors to “be fearful when others are greedy and greedy when others are fearful.” But how can you do that in practice? Worse, how can you exercise that sort of emotional control, if you don’t understand the psychological factors that are working to derail you?

The difference between planning and meddling

First, let’s stop talking about ‘bias’ and start talking about ‘biases’. There are many, in fact, in our new White Paper, Making Better Decisions: Know Your Behavioural Biases, we identify 17 different types of mental process that can dangerously skew your financial decisions.

These are the things that cause us to interfere where we shouldn’t, jump at shadows and think we know better. Being an engaged investor is a good thing, but the kind of engagement that really matters is to set out at the beginning a clear, well-constructed plan that meets your goals.

It makes sense to periodically make sure this plan is still on track and still reflects your needs, but beyond that, the most affirmative action you can take is to leave it alone. Buffett and Bogle both knew this and we think you should too.

Read Part 1: Anchoring Bias →

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.

If you want to read our guide all at once, you download Making Better Decisions: Know Your Behavioural Biases in full now.

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