We wrote in January about “Staying out of your own way”, a piece that resonated with a lot of people in these volatile investment markets. In this article, we spoke about how managing our own behaviours is the single factor that will probably have the greatest impact on our investment success.

Now picking up that theme again and going a little deeper, we’re going to explore some of the main biases that unfortunately are in-built within us and that can really cloud our judgement when it comes to investment decisions. These biases regularly trip up even the most experienced investors.

Recency

Recency bias is a bias towards placing too much emphasis on recent events, as opposed to looking at a longer-term picture. An everyday example is when someone is asked to list their 10 favourite books or movies. What often happens is that the person will give far more weight to recent reading or viewing, as opposed to thinking through what their favourites really are.

This pops up a lot in investing where investors give far too much weight to recent events. An example is where a stock or even a market takes a short-term dip. Even if this is after a prolonged growth period, investors can often give too much weight to the recent dip, as opposed to considering the long-term trends.

Anchoring

Anchoring bias is where you base a decision on a past piece of information, even though the old information may have become irrelevant at this stage. A good example of this in relation to investing is when we see people anchoring investment decisions to the price paid for an asset. Thy might say that they bought a share at €10, so they won’t sell it for less than that. However they are forgetting that the market doesn’t care what you paid for the share – this is irrelevant to the future performance of that share. Instead investors should lift that anchor and decide whether to keep or sell that share based on the actual fundamentals impacting the share price.

Loss Aversion

This is one that has visited us all at some stage… Basically we hate losing far more than we enjoy winning, in fact some researchers have suggested that the pain of losing stays with us twice as long as the joy from winning. Listen to Roy Keane – some of the big losses in his career still gnaw away at him, while he rarely thinks of the successes he enjoys. Doug Sanders, who lost the British Open in golf in 1970 after missing a 3ft putt on the last hole was asked about how often he thought about it. His answer was that thankfully it got easier with time – he now only thinks about it once a day.

When it comes to investing, we can cloud our decisions by the small losses we suffered. The pain of accepting a loss and moving on is too great in our minds and can stop an investor selling a stock at a loss, even though the future outlook might not be good. People can become frozen with the fear of losing.

Confirmation

The nodding donkey… We all have pre-conceived ideas about subjects, even ones where our basis of opinion is questionable. Then you receive more information that appears to “confirm” your previous hunch, and this guides a decision. The challenge with this is that you are not considering all of the available information, instead your hunch has been apparently confirmed as correct. When investing, it makes sense to consider all of the information available and put your own pre-conceived ideas aside. Something may show up in the new information that quickly demonstrates that your original hunch may have been misguided. 

As we said back in January, the key to investing is often staying out of our own way, as our behaviours can really undermine our potential to achieve successful outcomes. Keeping up the saving habit, staying focused on the plan and not trying to time the market are all important to your long-term success. Being aware of your own biases is important too. Identify the ones that possibly loom larger in your own though processes and check yourself against them before you make an investment decision.  

There’s been a lot of media talk over the last few weeks following the recent release of The Tinder Swindler on Netflix. How did these educated, smart women fall for the charms of Simon Leviev and end up giving him hundreds of thousands of euros? Unfortunately, it happens. Attempted scams are happening in different ways every day of the week now, and the key is to have your radar up and be naturally suspicious of any interaction with your money and a third party.

These scams are becoming more ingenious and harder to detect, so we’d like to give you a quick reminder of some of the most common ones. We all think “I’d never fall for that”, but people do – every day.

Investment scams

Of course, The Tinder Swindler was playing on the heart strings of the unfortunate women who fell prey to him. In their case, love clouded their judgement. We say it so often in our advice to clients, that emotions and investing are very poor bedfellows. Usually we’re not talking about the danger of love, but instead we’re referring to the two most common enemies of investors – greed and fear.

Time and again we’ve seen the dangers of investments that seem perfectly “normal”, but the anticipated returns are significantly in excess of those on offer elsewhere. Supposedly clever property investments in foreign markets that offer very high returns are a common trap. We all think that we understand the property market, and the risk is that our own biases cloud our judgement. It becomes too easy to ignore an often-complex investment structure that you don’t really understand, as the promised outcomes “confirm” your view of the attractiveness of a market. 

Be very careful, this is the time to really dig deeply into the regulatory status of the provider(s) and the product. Make sure that all the fundamental elements are in place and that you have a deep and complete understanding of what you are investing in. If something looks too good to be true, it usually is just that.

The helpful phone call

OK, the days of falling for the “you’ve got a virus on your computer, and I’ll help you fix it” are pretty much over. These basic scams have now progressed to calls supposedly from your bank of from Revenue, attempting to get you to log on to your computer. The scammer then tries to get you to either reveal sensitive data or download some malicious code that will give them access to your machine. Most people spot these a mile off, but unfortunately some less aware or elderly people still fall prey to these not-so-helpful phone calls.

The challenge for all of us is when you’re just not 100% sure that it’s a scam. The key is not to engage or use any information given on the call. Don’t use any supplied links, phone numbers or other information being offered to verify the validity of the call. Instead disengage, source contact details for the business that is calling you from your own independent sources – Google might be a good place to start, and then only contact the business using this publicly promoted information.

Dodgy emails and links

We all saw an explosion in these during the pandemic, a lot of it driven by people working from home. IT security was a bit more lax in many cases, as laptops were not as secure as when used within the office environment. Also, as people’s environment had changed, this left them more susceptible to new cons. The most common one was in relation to deliveries – the email from a courier company that notified of an import charge due, that would enable the release of a parcel. The payment link was an attempt to get your bank details. The problem with these types of messages is that they look genuine. In some cases, the branding closely mirrors that of the courier company.

Again the advice is never to click on these links, to only interact with organisations through access points that you have independently verified yourself. 

The challenge for us all is that as we age, it’s harder to stay up to date with technology. This leaves us more vulnerable. To support you, this is where trusted members of the next generation might play an important role in your life. Reach out to them and ask them to help you stay informed of new threats and how you can avoid them.

You certainly don’t need to live your life worrying about being scammed, but be aware of the possibility and by default be suspicious of any unsolicited approaches. Your caution will be well-placed.