You’re probably already aware that cognitive biases can influence your investing decisions.
But did you know that many of them are inherited from your Stone Age ancestors?
Financial experts around the world have studied the psychology of investing and drawn some fascinating conclusions about how our thought processes have evolved since we were living in caves and surviving as part of a tribe. Interestingly, though our way of life is now unrecognisable from that time, the way our brains process information and form conclusions hasn’t kept up with that progress.
Consequently, it can be tricky to make objective and rational decisions about modern-day life, such as managing your investments.
Read on to discover three behavioural traits that can be traced back to your Stone Age ancestors and how they can affect your investment decisions. Additionally, discover how your financial planner can help you to overcome these biases so you can make the most sensible decisions for you.
1. Feeling the pain of loss more acutely than the joy of a win
The vast majority of investors are likely to experience both highs and lows as they grow their wealth on the stock market. If your portfolio has experienced fluctuations in value, have you ever noticed that you are more disappointed by the drops than you are pleased by the increases?
Humans are wired to feel the pain of a loss more acutely than the joy of a win, and this is in part down to traits we’ve inherited from our caveman ancestors.
Back then, losses could be devastating. For example, if you were injured and unable to hunt, your family group risked starvation or attacks from animals. So, it was vital to avoid these losses to maintain your group’s safety.
Wins, such as succeeding in a hunt, meant you could feed your family that day – a good thing for sure, but less eventful than the loss of being unable to hunt or defend your tribe.
When it comes to investing, this aversion to loss can cause you to play it safe with your investments. You might avoid any moves that risk losing you money, even if it reduces your opportunities to generate positive returns and grow your wealth.
2. Following the crowd to keep yourself safe
Another trait that was vital to survival in the Stone Age was what we now call “herd mentality”.
Our caveman ancestors needed to be part of a family group, as everyone brought different skills that enabled them to thrive as a group. Being cast out or going your own way would usually be a death sentence.
This need to be part of a group shows up in a lot of our modern-day behaviours. When it comes to investing, it might be behind the tendency to make investment decisions based on what is popular at the time. When certain stocks become popular, more and more people are likely to pile in and invest their cash.
But this isn’t always a sensible choice. As you are likely already aware, past performance does not guarantee future performance. Plus, the investments that are suitable for your friends or colleagues may not be aligned with your personal goals or attitude to risk.
Following the herd in this instance could mean that your wealth does not have the opportunity to grow as quickly as you need it to, risking your ability to achieve your goals.
Read more: Are you putting your wealth at risk by investing in the latest hype cycle?
3. Overestimating your own competence or knowledge
We’ve all met someone who took undue credit for successful outcomes that had little to do with them. Though it can be frustrating to deal with today, this was a very useful trait for the members of our ancestors’ tribes who needed to go out and hunt.
Heading out into the wilderness to hunt for food was a risky business; those who were tasked with this responsibility needed to have a lot of self-confidence. This would often translate into an inflated sense of their own competence – if a hunt went well, it was because of their exceptional ability, whereas if it went badly, it could be blamed on external conditions getting in the way of the hunters’ incredible skill.
These same traits are much less helpful when investing. An inflated sense of skill or expertise can lead you to make more risky decisions, believing that you know better than others or perhaps mistaking a coincidence for a trend. As such, you could end up losing money as a result of poor decision-making based on ego rather than research.
Your financial planner can help you to identify and overcome unhelpful investing behaviours
Every investor, no matter how long they’ve been investing for, can experience the cognitive biases that result from the traits you’ve read about above. Fortunately, your financial planner has first-hand experience of guiding many other investors through these challenges so that they can make the most sensible choices about their investments.
They can help you to identify bias and keep your emotions in check, no matter what happens on the stock market. With careful research, they can help you to identify the investments that are most likely to offer your wealth the opportunity to grow so that you can achieve your goals.
If you’d like to learn more about how we can help you with this, please get in touch.
Either contact your financial planner directly, email us at hello@ascentawealth.com or fill in our online contact form to organise a meeting and we’ll get in touch.
