Perseverance is generally seen as a desirable, but in the case of financial decision-making doggedness can be more of a liability. Learn more about belief perseverance bias and other forms of emotional investing.
Perseverance is generally seen as a desirable trait, but when it comes to financial decision-making the rigid thinking associated with perseverance can actually work against investors, according to financial planning experts.
“According to traditional economics, people act rationally by objectively evaluating all available information,” David Zuckerman, a certified financial planner, said in insights provided by the Financial Planning Association. “Unfortunately, rational decision-making is often encumbered by behavioral biases that favor existing beliefs and opinions over new information.”
Conservatism bias causes investors to favor existing opinions at the expense of new information that could help improve investment outcomes. The “perma-bears” who failed to participate in the post-crisis stock market rally fell victim to their own conservatism bias, Zuckerman said. Investors can also be biased by the illusion that they have control over an outcome, a bias that can lead to over-trading or to concentrating assets in company stock.
Even the savviest investors admit to emotional decision-making, according to Millionaire Corner research on the attitudes and behaviors of affluent investments. More than half (55 percent) of high net worth investors, who have investable assets of $5 million or more, indicated they had made financial decisions based solely on emotion, according to a survey of 1,160 investors conducted in May of 2011. How do high net worth investors rate decisions made without the benefit of “research, background investigation or recommendation from a trusted source?” Not surprisingly, they gave their emotionally based financial decisions an average rating of 43 on a 100-point scale, with zero representing poor and 100 equaling excellent.
Investors who become familiar with their own biases – by keeping an investment journal or working with an advisor - can avoid irrational behaviors and improve their investment outcomes, Zuckerman said.