Guarding Againist the Four Common Money Biases
Our attitudes about investing, saving, spending and financial matters are shaped by a variety of influences, both early and later in life. These attitudes can foster some very good habits, ones that may promote smart financial choices, early investment, and the accumulation of assets. The downside is that they may also encourage unconscious biases about money, and like many varieties of bias, it is wise to acknowledge and be aware of them.
There are four common money biases. One is loss aversion, when the fear or worry of losing assets seems out of proportion to the opportunity for gains or asset accumulation. Two is overconfidence – assuming that financial markets nearly always perform well, or that one's personal financial acumen is infallible. Three is present bias, which is often seen in consumer behavior – the preference for a material item or a quick financial gain now, instead of delayed gratification for the possibility of better outcomes years ahead. Lastly, there is base rate neglect – an overreaction to bad (or good) news that makes a saver or investor lose sight of the worth, or risk, of a particular investment. Recognizing our potential for these biases may prevent a rash financial decision or two, especially as the retirement transition nears or occurs.1