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Exploring the Behavioral Biases of Investing


Despite the research and due diligence necessary in developing an investment portfolio, investors are frequently influenced more by their own emotional and behavioral biases than by data.1 These biases may include overconfidence, regret, impatience and the desire to “keep up with the Joneses.”

In fact, personnel from at least one asset management firm believe that the company has a better chance of outperforming the market by anticipating investor behavior. At a macro level, the behavioral biases of a large number of investors may be able to influence the expectations of company performance and even its stock price. By tracking patterns among such biases, it may be possible to capture a higher return on investment relative to other market fundamentals.2

Although there may be truth to that, we believe that investment selection should be based more on individual goals than on mass market speculation. As financial advisors, we help clients get to the crux of their objectives and design a financial strategy around their long-term goals, timeline and tolerance for risk. Markets will always fluctuate, regardless of the impetus, but our job is help reduce the impact of behavioral biases and help keep your financial strategy on track. Please contact us if you’d like to learn more.

Within the study of behavioral finance are subfields. For example, biases can be cognitive, meaning an investor may think and act in specific ways or by following a rule of thumb. A behavioral bias also can be emotional, relying on feelings rather than information. An example of this is “self-attribution bias,” wherein investors tend to believe their investment success comes from their own actions but blame poor performance on external factors.3

Cognitive biases often are characterized by the inability to fully process statistical information or by memory errors.4 In some cases, cognitive bias manifests in simply not acknowledging when there is too much information for a person to process. In this scenario, it is common for an investor to cling to the original reason he or she made the investment — even when presented with new and potentially damaging evidence.5

Another common investing behavioral bias is an aversion to loss. In fact, investors are generally more afraid of losing money than they are of embracing the thrill of stock market success. This inherent fear of loss can, in fact, make an investor unwittingly more conservative than he needs to be or, depending on financial circumstances, should be.6

Content prepared by Kara Stefan Communications.

1 Tim Parker. Investopedia. “4 Behavioral Biases and How to Avoid Them.” https://www.investopedia.com/articles/investing/050813/4-behavioral-biases-and-how-avoid-them.asp. Accessed Jan. 5, 2018.

2 John R. Riddle. 361Capital. “Bounded Rationality: Tapping Investor Behavior to Source Alpha.” http://361capital.com/financial-advisor/viewpoints/bounded-rationality-tapping-investor-behavior-to-source-alpha/. Accessed Jan. 5, 2018.

3 Brad Sherman. Investopedia. April 12, 2017. “8 Common Biases That Impact Investment Decisions.” https://www.investopedia.com/advisor-network/articles/051916/8-common-biases-impact-investment-decisions/. Accessed Jan. 5, 2018.

4 Peter Lazaroff. Forbes. April 1, 2016. “5 Biases That Hurt Investor Returns.” https://www.forbes.com/sites/peterlazaroff/2016/04/01/5-biases-that-hurt-investor-returns/#74592db8d4ac. Accessed Jan. 5, 2018.

5 361Capital. “Behavioral Finance Basics.” http://361capital.com/wp-content/uploads/361Capital-Behavioral-Finance-Basics-Infographic.pdf. Accessed Jan. 5, 2018.

6 Peter Lazaroff. Forbes. April 1, 2016. “5 Biases That Hurt Investor Returns.” https://www.forbes.com/sites/peterlazaroff/2016/04/01/5-biases-that-hurt-investor-returns/#74592db8d4ac. Accessed Jan. 5, 2018.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Ryan Keapproth

Ryan Keapproth

Retirement Planner

Ryan is dedicated to serving clients to achieve their retirement goals. Ryan’s holistic approach centers on wealth management strategies with a focus on income planning throughout retirement. As a Financial Advisor, Ryan is an Investment Adviser Representative (IAR), life and health insurance licensed and a Certified Tax Preparer. Ryan is a graduate of the University of Minnesota, with an Accounting and Finance major.

Ryan is a lifelong Minnesotan originally from Woodbury and currently residing in Bloomington with his wife, Riamae, and their rescue Terrier Beagle mix, Douglas. He and his family are avid travelers in their free time. Ryan enjoys playing golf and poker, and describes himself as a major foodie enjoying new restaurants around the cities whenever possible. He is a sports fan especially when the Vikings and Timberwolves are playing.