How to Fight These Four Behavioral Biases

The biggest investing risks are born of human decision-making, according to a recent CFA Institute article that outlines behavioral biases and how to combat them.

“Biology encourages our brains to take cognitive shortcut that can cause big problems,” the article states, but adds that there are workarounds to these tendencies. It cites comments from psychologist Daniel Crosby, who believes that identifying these biases is the first step to overcoming them. Crosby condenses what academics have identified as roughly 200 types of cognitive biases into four primary types, as follows:

  1. Ego: Ego-driven behaviors appear in the form of overconfidence, in believing that our insights are more accurate than those of others;
  2. Conservation: When we tend to stick with what we know, “conflating the familiar choice with the best choice;”
  3. Attention: This allows our memories to influence how we evaluate probabilities. Crosby uses the example of how people avoided plane travel after the 9-11 terrorist attacks, which in turn led to an increase in traffic fatalities;
  4. Emotion: According to Crosby, “We confuse our emotions with our risk management. We confuse what’s fun and what makes us emotionally feel good with what’s safe.”

Crosby asserts that counteracting these biases requires the careful evaluation of data and an effort to remove emotion from decision-making. The article concludes, “He singled out meditation, in particular, as being especially useful for investment professionals looking to reduce emotional attachment.”