Don’t let subconscious biases affect your financial decision making

When it comes to making important financial decisions, we like to think that we make them in a rational manner based on the facts that we have in front of us. But the reality is that we’re human and, even when armed with all the facts, we are still subject to subconscious biases shaped by our backgrounds and experiences. 

There are numerous psychological influences that can affect how you not only make trivial day-to-day decisions, but also the big ones in your life such as immigrating, the selling of a business and assets and/or putting together backup plans for the future.

Being aware of our biases and being able to recognise them, will mean better, more sustainable and quality long-term decisions.

Anchoring bias

At its simplest, anchoring bias is believing the first piece of information you learn, or your initial experience of something, over subsequent information and experiences. Psychologists have found that when people are trying to make a decision, you often use an initial anchor or focal point as a reference, which can have a serious impact on the decision you end up making.

If we think about this in terms of finance, it could mean hanging on to an investment for too long while hoping it will reach your initial purchase price or anchor and not its current value.

Confirmation bias

Confirmation bias is a very common bias where you search for, interpret, favour, and recall information in a way that confirms or supports your prior beliefs or values. You are more likely to believe information that confirms what you already believe, even if it’s flawed. 

The confirmation bias can affect the way you decide how to invest money. For example, investors give more weight to information that confirms their pre-existing beliefs regarding the value of certain stocks as opposed to reality.

Halo effect 

The halo effect is a type of cognitive bias where you may be guilty of dismissing the flaws of a person based on your overall positive impression of that person. In other words, they can do no wrong because you like them for another, unrelated reason. 

A good way to illustrate this is by considering at brand reputation. When a company puts out a new product, you assume it will be good because of how well their other products have worked for you in the past. You trust it without knowing anything about the new product.

Familiarity bias

Familiarity bias is best illustrated by the old Wall Street adage: “Invest in what you know.” It’s the tendency to prefer something that is familiar to you and avoid the unknown. This tendency is present in all areas of life such as the foods we choose to eat or the route we take on our morning commute. You may miss out on great opportunities if you’re not open to evaluating all the options that are available, especially when it come to your future.

For instance, when you are considering alternative citizenships, you prefer a jurisdiction that is familiar to you, and or the comfort of having family or friends nearby.

Sunk-cost fallacy

Sunk-cost fallacy is the phenomenon where you are reluctant to abandon a course of action because you have invested too heavily in it, even when abandoning it would be more beneficial. Rather than accepting the loss, you tend to invest more to make up the loss when in reality you are more likely to double that loss.

In economic terms, sunk costs are costs that have already been incurred and cannot be recovered. For instance, you bought a ticket to a concert but when the day comes, you’re sick and it’s raining. Not going to the concert is the better option for your health, but chances are you may still go following which you may feel you did not get your money’s worth.

The empathy gap 

The empathy gap is the tendency to underestimate the impact that your emotions have on your decisions. You may therefore make incorrect predictions about your future behaviour. There are two mental states you can find yourself in: hot (high emotions) or cold (logical and rational). When you’re in a cold state of mind, you tend to think that you will act rationally in a high-stress situation. Conversely, when you’re in a hot state of mind you have the tendency to make rash choices and act recklessly. These short-sighted decisions can lead to behaviour that is not in your best interests and when you calm down, you realise that hindsight is 20/20.

For instance, you overestimate your ability to choose a healthy meal in the future when you’re currently not hungry. But when you find yourself in a situation where you’re starving, and possibly exhausted, it’s so much easier to succumb to grabbing a quick take out meal.

System 1 hijack

Psychologist and economist, Daniel Kahneman, divided our minds into two systems. System 1 is the brain’s fast, automatic, intuitive approach whereas our System 2 thinking is the mind’s slower, more analytical mode, where reason dominates. This bias is similar to the empathy gap bias but has more to do with fast and slow thinking rather than having our emotions impact our decision making.

System 2 thinking is only activated when you’re faced with a situation that you’re unfamiliar with and force yourself not to think impulsively. That means that your System 1 thinking is making most of your decisions – fast and intuitively. System 1 is primed for survival and serves us well in our day-to-day life but it’s not very good at processing statistics.

As human beings, we are susceptible to our System 1 hijacking our rational thoughts and decision making, especially when it comes to those requiring a logical approach. Financial decisions clearly require a considered approach but often made on a “snap” basis.

Herd mentality 

Herd mentality is the idea that people are more likely to follow the majority. If you’re hearing about a lot of people making a particular financial choice, you’re more likely to make it too even if it’s not a sound choice for your personal circumstances. This is largely influenced by emotion and instinct, rather than by independent and rational analysis. In finance, herd mentality bias can be seen in investors’ tendency to follow and copy what other investors are doing, instead of making informed decisions based on personal preferences and circumstances.

The Explore Report can help you make unbiased decisions

“You can’t build a house without an architect’s plan”, similarly you can’t build your future without a plan. If you do, brick by brick it will come tumbling down. Emotion amplifies biases, at random or pivotal times in one’s life. We live in uncertain and challenging times, and one way to deal with this uncertainty is to logically explore what the world has to offer and whether your education, skills, and/or wealth experience is needed elsewhere around the globe.

Sable International’s Explore Report is designed to help you make rational decisions and avoid these biases as much as possible. After answering an in-depth questionnaire, it provides you with numerous options in terms of possible citizenship, alternative routes to citizenship, lifestyle, costs, income and spending analysis, and an approach to global wealth management. It gives you expert guidance on which path to choose, based on your unique circumstances.

Here is how the Explore Report works:

1. You fill out an in-depth questionnaire about your circumstances. Sable International is 100% compliant with all data protection laws, so you can rest assured your information is safe and will only be used to help you.
2. You discuss your goals with a Sable International consultant. These will be considered when weighing up your options. 
3. Your report is drawn up. The decades of experience and knowledge, combined with ongoing research by Sable International, will be used to evaluate your possible options and evaluate your aspirations.
4. You are presented with recommendations that best suit you. Qualified Sable International consultants will talk you through your options and assist you in refining your unique action plan.

It’s best to make life changing decisions from a place of rationality, armed with facts. Sable Explore offers a full-scale assessment of your current circumstances and goals.

We have over 20 years’ experience in international citizenship that you will have at your disposal to understand your options, draw up your unique plan and implement it. Get in touch at +27 21 657 1507 or explore@sableinternational.com.