Cognitive vs. Emotional Biases

An investor’s behavior is commonly influenced by an accumulation of attitudes and biases that can create anxiety during transitionary times. Financial education and experience can help alleviate such influences and provides investors with an opportunity to address their fears and alter behavior.

There are two distinct groups of biases: cognitive and emotional.

Cognitive biases address the mental processes of investors based on established concepts that may or may not always be accurate. The “bandwagon effect” is commonly associated with the idealization of investing along with the crowd and sometimes provides investors with heuristics to locate a simple solution to a complex issue. Heuristics are commonly the culprit for investors utilizing past performance as an indicator of future performance by making a premature decision rather than obtaining all information available to make a fully educated decision.

Emotional biases are based on the investor’s personal feelings when a decision is being made and can be influenced by prior experiences that alter the decision-making process. Overconfidence bias is commonly associated with the investor’s hindsight of overestimating the likelihood of the desired event while underestimating the probability of an adverse event. Loss aversion bias is the emotional and psychological bias that focuses more on avoiding losses (pain) than making gains (joy)— this can create a negative cycle of holding onto losing positions longer and selling winners too quickly.

What are you to do as an investor?

Logical and analytical thinking can often mitigate the desire to lean on biases when making critical financial decisions. Acknowledging the emotions associated with investing can also help provide habits to approach the decision-making process more rationally.

At G&S Capital, we believe in using a disciplined investment process with rules-based guidelines. Emotions are easier to combat when you already have a strategy in place.

At G&S Capital, we build dynamic portfolios and risk management strategies for each of our clients. Our client projects are led by knowledgeable, dedicated financial planners and supported by the G&S Capital team of specialists to provide personalized portfolios, unparalleled service, and independent advice