With some 95% of its activity occurring subconsciously, your brain can be quite tricky. With every spontaneous signal, our cerebral synapses expose us to countless behavioral biases, duping us into making misguided money moves long before our rational resolve kicks in.
Since many of our most powerful biases are based on reflexive rather than reflective thinking, it’s not enough just to be aware of them. We must also learn how to defend against them. Or better yet, turn them to our advantage. How do you do that? By tricking your brain right back.
Auto-Save Yourself
In their aptly entitled book, “Nudge,” Nobel laureate Richard Thaler and co-author Cass Sunstein refer to this sort of trickery as a “nudge.” As they describe it, nudges should not replace your free will; they should just make it easier for you to make your own best choices.
Nudges don’t have to come from outside influencers, either. You can nudge yourself.
For example, we’ve long known about putting your personal saving habits on auto-pilot. In 1926, when George Clason first published his timeless classic “The Richest Man in Babylon,” he described this as learning to “pay yourself first.” By forming lifelong “pay yourself first” habits, you can replicate within your personal accounts the same saving success found in the retirement plan world. Leveraging what Thaler and Sunstein refer to as our “yeah, whatever” bias, the trick is to shift away from saving what’s left after spending. Instead, set aside your savings before spending the rest. In so doing, you’re once again using inertia to your advantage.
Don’t Look Now
We’ve also long known how susceptible investors are to FOMO (fear of missing out), loss aversion, recency, and a bevy of other behavioral biases that trick us into chasing breaking news, rather than maintaining a more sustainable long-term perspective.
Watching the market’s bouncing ball can also leave you more unhappy than if you only check in periodically. As Nobel Laureate Daniel Kahneman observed:
“If owning stocks is a long-term project for you, following their changes constantly is a very, very bad idea. It’s the worst possible thing you can do, because people are so sensitive to short-term losses. If you count your money every day, you’ll be miserable.”
So, don’t do that. Don’t let yourself look at the market’s daily news. Instead, nudge yourself into staying focused on what really matters by limiting your looks to quarterly, or even annual performance reviews.
Blind Ambition
Arguably, one of our greatest behavioral foibles may be blind-spot bias, or our inability to see our own biases, even when we can readily spot the same tendencies in others.
Kahneman was famous for going out of his way to seek feedback from others, especially those whose temperament and perspective differed from his own. In his final publication, “Thinking, Fast and Slow,” he explains:
“We are often confident even when we are wrong, and an objective observer is more likely to detect our errors than we are.”
At Azzad, we believe one of our most important roles is to serve as our clients’ “objective observer,” holding up a mirror whenever a blind spot may be blocking their financial view. If we can assist you in similar fashion, we hope you’ll be in touch with us today.