There are so many investment-impacting behavioral biases, we could probably identify at least one for nearly every letter in the alphabet. Today, we’ll continue with the most significant ones by looking at: hindsight, loss aversion, mental accounting and outcome bias.
HINDSIGHT
What is it? In “Thinking, Fast and Slow,” Nobel laureate Daniel Kahneman credits Baruch Fischhoff for demonstrating hindsight bias – the “I knew it all along” effect – when he was still a student. Kahneman describes hindsight bias as a “robust cognitive illusion” that causes us to believe our memory is correct when it is not. For example, say you expected a candidate to lose, but she ended up winning. When asked afterward how strongly you predicted the actual outcome, you’re likely to recall giving it higher odds than you originally did. This seems like something straight out of a science fiction novel, but it really does happen!
Losing your spouse is hard enough without having to worry about the retirement you have built together. After many years of responsible saving and planning for a comfortable retirement together, it can be devastating to face the prospect of taking on those carefully laid plans alone. Though nothing can ever make up for the loss of a spouse, there are ways in which a widow or widower can lessen the financial burden by collecting some of a spouse's retirement funds.
Let’s continue our alphabetic tour of common behavioral biases that distract otherwise rational investors from making best choices about their wealth. Today, we’ll tackle: fear, framing, greed, and herd mentality.
FEAR
What is it? You know what fear is, but it may be less obvious how it works. As Jason Zweig describes in “Your Money & Your Brain,” if your brain perceives a threat, it spews chemicals like corticosterone that “flood your body with fear signals before you are consciously aware of being afraid.” Some 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.
When is it helpful? Of course, there are times you probably should be afraid, with no time for studious reflection about a life-saving act. If you are reading this today, it strongly suggests you and your ancestors have made good use of these sorts of survival instincts many times over.
Publishers Clearinghouse has long been famous for its big checks and big winnings, but it has recently come to our attention that scammers have been using the PCH name and logo to commit fraud.
Although PCH's sweepstakes are legitimate, you still need to be very cautious if you receive a prize notification from PCH or any other company claiming you are a big winner. We are advising all of our clients to shred and ignore notifications from PCH and to be wary of all prize notifications, especially ones that ask for money.
Welcome back to our "ABCs of Behavioral Biases." This article introduces you to four self-inflicted biases that knock a number of investors off-course: anchoring, blind spot, confirmation and familiarity bias.
ANCHORING BIAS
What is it? Anchoring bias occurs when you fix on or "anchor" your decisions to a reference point, or default when required to estimate an unknown value.
When is it helpful? An anchor point can be helpful when it is relevant and contributes to good decision-making. For example, if you've set a 10 pm curfew for your son or daughter and it's now 9:55 pm, your offspring would be wise to panic a bit, and step up the homeward pace.
Book By: Kathleen Burns Kingsbury (Praeger, 2017) Reviewed by Julie Fortin, CFP®, FBS®
Mixed financial messages abound when it comes to our collective money culture. Money can often bring up feelings of discomfort, anxiety, or shame. Consequently, money can be an uncomfortable topic of conversation that is typically avoided at all cost. However, this cultural confusion and silence around money is causing more harm than good when it comes to our emotional and financial health.
Robin Young of Northstar Financial Planning on getting to the heart of what is most important to people
This article was written by Lois Shea of the New Hampshire Charitable Foundation and originally featured on nhcf.org.
Research shows that people want their professional advisors to ask them about charitable giving. And sooner rather than later. The “U.S. Trust Study of the Philanthropic Conversation,” conducted in partnership with The Philanthropic Initiative, showed that virtually all high-net-worth people think this discussion should happen within the first several meetings with an advisor. A third think the topic of charitable giving should be raised in the very first meeting. Yet fewer than half feel their advisors are good at discussing personal or charitable goals with them.
Wondering how to start a conversation about charitable giving with your clients? Or looking to refresh it?
In the coming months, we will be sharing a series of articles about behavioral biases and the impact on investment and planning decisions. As financial advisors, it is our role not only to help our clients successfully plan for and invest in their future wealth, but also to act as a coach, helping clients to better understand wise investing strategies and the long-term, global approach that we take in our wealth management process. Our goal is to guide clients to make decisions that serve their best interest. We encourage you to provide us with feedback as each new article is released and we look forward to an active dialogue on the subjects. Enjoy!
Nearly 60 percent of the people receiving Social Security benefits are women. While Social Security benefits are completely neutral when it comes to gender, there are ways in which women can benefit from thinking strategically about their Social Security income so that it can be of maximum value to them throughout retirement. Understanding the information in this article can help you better prepare for what you can expect from your Social Security benefits and can help you to determine when you should begin drawing from what you are eligible for.
The Tax Cuts and Jobs Act was just released by the House Ways and Means Committee and it contains a large number of provisions that would affect individual taxpayers.
Here are some of the key provisions:
Tax rates
Under the bill, individuals would be subject to four tax rates, instead of the current seven: 12%, 25%, 35%, and 39.6%, effective for tax years after 2017. The rates under the bill would be as follows:
The Intricacies of marriage and/or living with your partner later in life
While more and more older women are choosing to live with their partners, it doesn’t mean that there is a rise in marriage among this group of individuals. In fact, many older adults are delaying a trip to the altar or putting it off entirely.
A recent poll from the Pew Research Center reports that the number of people age 50 and older who live together with their unmarried partner increased by 75% between 2007 and 2016. A decade ago, 2.3 million mature unmarried adults were cohabitating and now that number is 4 million. That is almost a quarter of all adults who live together.
Book By: Kathleen Burns Kingsbury (Praeger, 2017)
