Behavior and finances: How our biases affect our assets (or lack thereof)
Morningstar analyzed a nationally representative sample of Americans, connecting their demonstrated levels of bias with their assets and their overall financial health.
Although finance is driven by hard numbers, emotions such as fear, elation or anxiety also influence decision making. This has been especially true during the heightened economic stress of the pandemic.
Morningstar analyzed a nationally representative sample of Americans, connecting their demonstrated levels of bias with their assets and their overall financial health. Among the findings:
Various kinds of bias. The majority of Americans show biases of present bias, loss aversion, overconfidence and base-rate neglect.
Across all groups. These biases can be seen across all age, income and education groups, even if there are some differences by groups.
Overconfidence ties to youth. On average, younger people showed higher levels of overconfidence compared with older individuals.
Higher bias levels equal worse financial outcomes. This is true across a wide range of domains, including financial health, checking and 401(k) account balances, and self-reported credit scores. These results hold true even when controlling for factors such as income, education and financial literacy.
Higher bias levels equal less effective financial behavior. Higher bias levels also directly correlate with detrimental financial behaviors, from failing to plan ahead to failing to save and invest.
Not gender-based. Some common perceptions about these biases may be misguided. For example, one gender is not more biased than the other, by and large.
Can be dealt with and neutralized with help. Numerous techniques are available to individuals and their advisors to help combat these biases and their negative effects on people’s financial health and wealth.
Blind spots are called that for a reason. “We know most people aren’t great at recognizing their own biases,” the authors of the report said.
“It’s common to have a bias blind spot (the tendency to recognize the impact of biases on the judgment of others while failing to note one’s own). Factors such as overconfidence and cognitive dissonance distort our perception of our biases.”
This finding is especially pertinent when it comes to investing, where a belief in the superiority of one’s own reasoning and the perception of bias in others can directly result in ill-timed market decisions, skewed asset allocations and more.
Opportunity for advisors to assist. Financial biases offer an opportunity for financial services providers to address unmet needs in the market with high-quality bias assessment and mitigation services.
“When it comes to their clients, advisors might have room for interventions that can help investors better understand their biases while avoiding any behavioral pitfalls that might be caused as a result of these biases,” the report said.
Value in coaching and intervention. The fact that biases are not neutralized by market forces might be an indicator for advisors that current bias-mitigation techniques — if they exist — are not enough. There is value in dedicated approaches such as behavioral coaching or specific bias interventions to help their clients.
The authors of the report say that financial biases can affect many financial areas of a person’s life, including credit score, net worth, saving and spending. And, they note, biases can affect more than finances, including how an individual actually perceives the world around them.
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