Are you prepared to acknowledge that your decision making is influenced by biases, or willing to accept if someone calls you out on that?
If you feel that you’re fully in control of your behaviour, you may not make it past the first and possibly highest hurdle: how to recognise and fix your behavioural biases and subconscious influences affecting your personal and financial decision making. Conformity bias, the fear of making mistakes, and the presence of optimism are the three biggest factors.
The topics I will deal with may be quite raw and confronting to some – it may be hard to admit that your behaviour is often out of your direct control, which often leads to people disbelieving and rejecting the concepts that I’m about to introduce.
A similar circumstance occurs in phone addiction; just like other addictions such as smoking or drinking, the biggest challenge is to admit that you are an addict. Truthfully, most of us can’t make it past that first step; despite massive evidence of phone addiction, most have trouble admitting it.
The same applies to acknowledging our psychological biases. Before reading the following, the biggest challenge is admitting that you have subconscious influence over your behaviour.
People will almost always push for a common consensus within a group to create and maintain harmony.
Whether we like to admit it or not, as human beings, we’re not psychologically built to stand out from the crowd. We’re naturally and heavily biased towards what our peers are doing; this influence likely predates to the hunter-gatherer era when we needed to stick together just to survive. By conforming, our ancestors were able to work harmoniously to fulfil their basic needs. It’s ingrained in our instincts as a species, long before we even considered investing, personal or professional growth.
In modern times, conformity affects us both consciously and subconsciously. The pressure to conform starts young, for example, when wearing a common uniform in school. Eventually it grows to dominate your life, from the clothes you wear, to the way you speak and even the way you think and behave.
In the book Nudge, academics Richard Thaler and Cass Sunstein note how teenage girls are more likely to have children if they see their peers in similar situations, while students with good scores in university likewise have academically similar dorm mates.
While these subconscious biases can lead to both positive and negative impacts, I believe that conformity bias creates large negative influences when it comes to both personal and financial decision making. It inhibits individuality and creativity, key elements for personal growth and financial success.
Perhaps you had once set out towards a positive goal, like learning to control your anger, overcoming laziness, or becoming a more responsible person. You may also have wished to become more polite and considerate, develop new skills or change towards a more positive mindset. However, it’s very difficult to achieve the change you seek if you’re simply standing in a crowd and following everyone else. Worse still, you could also be mixing in the wrong crowd.
Conforming to the crowd largely leads to merely average outcomes, either on a personal or professional level. Fight this bias – if you seek to stand out, grow and be different, because conformity bias inhibits personal growth. Ongoing learning is the key to personal growth and better decisions, and your ability to do this is heavily compromised if you’re simply following others’ actions and standards.
Successful personal growth is tied to motivation, the desire to improve, and the willingness to strive to make changes. Step out of your comfort zone and do things that are uncomfortable but for your own good, while keeping an open mind and a desire to learn and grow.
I have lived in Asia for more than a decade, and I’m still awestruck by the strong food culture in the region. Asia boasts of a great history, culture and patriotic folks who love their national food, whether it’s Char Siu, Chicken Rice, Pad Thai or Jollibee’s ChickenJoy. Your parents have also directly or indirectly trained your taste buds from a young age to like certain foods, and this is difficult to retrain. These factors may seem innocuous, but they highlight another conformity bias, which is that people tend to eat the same socially accepted food as those around them.
Due to economies of scale, along with basic supply/demand needs and the human desire for convenience, socially accepted and popular food also tends to be the cheapest and most abundantly available. For example, big businesses are often biased towards putting the least healthy foods in our supermarkets and restaurants. Driven by a profit motive, they appeal to consumers’ tastes, food addictions and advertising dollars. To realise how big business and economics influences food presence in your supermarket, look no further than Coca-Cola’s domination of shelf space and visibility.
Most restaurants are simply a magnified version of a supermarket, as they offer a diminished range of food choices, driven by simple economics. Given their profit-driven nature, nutritional food becomes even more difficult to find. I’d go so far as to say that people are led to a false reality about nutrition due to the easy availability and accessibility of unhealthy food like McDonald’s.
This type of conformity bias makes us think that it’s okay to consume unhealthy food simply because it’s everywhere and everyone else is eating it – despite being aware of what is nutritious, we’re still inclined to adopt poor diets.
Thaler and Sunstein’s concept of investment goods vs sinful goods, as highlighted in Nudge, is very insightful. Sinful goods like alcohol, smoking, sweets and sugar offer immediate satisfaction with delayed harm, while investment goods like exercise, healthy food and dental care promote delayed benefits. Unfortunately, people instinctively gravitate towards the feel-good urges of sinful goods, including the most available, convenient and often the cheapest unhealthy food.
Another major source of influence in your daily life is social media. Thanks to social media and the growing addiction to being online, we’re exposed to socio-behavioural norms on an unprecedented level. Online media colours our perceptions of what we think people around us are doing. If we spend our lives online, we’re more likely to conform to influences there than the traditional/physical ones around us.
We’re living in an age where people tend to ignore or dismiss real-life folk and influences around them, in favour of receiving attention from the online world. Social media is so often fake, filtered and corrupted by business and personal interests (for example, blogging, political outreach and revenue generating strategies) that the lines between reality, others’ projection of their reality and advertising are increasingly blurring. For most of us, this toxic mix now represents our main source of social influence.
When investing, conforming to the pack leads to an average outcome. This may be fine if you simply wish to hold a balanced portfolio and achieve average long-term returns. However, if you seek to outperform on your investments, either due to your own decisions or those of your advisor or fund manager, you’ll be fighting a tough battle against conformity bias. By construction, generating outperformance is a zero-sum game; conforming to the pack gets you an average outcome. Invest differently and be willing to take risks where others will not, to stand out from the crowd.
In The Little Book of Behavioural Investing, James Montier shines a light on how going against the crowd makes people scared. Going against the herd not only triggers fear, but can possibly cause pain. This instinctive fear and pain drives us towards conformity and average investment outcomes.
With unprecedented access to information and the internet, the millennial generation is at risk of being more short-term focused than their predecessors, leading to a higher chance of making poor investment decisions and gravitating towards sinful goods. Over the past year, almost every millennial I’ve spoken to is investing in either digital currency, gold or other currencies. Although these might help you stand out from the traditional investing crowd, they are also highly speculative and plagued by the temptation to make a quick buck – none meet the well-documented characteristics of long-term investments.
It’s subconscious and naturally instinctive: are millennials less willing to analyse the detail and lacking the patience to invest? Or is the opportunity to speculate just too irresistible? The former will lead to poor financial decisions and less long-term wealth.
In all fairness, the millennial generation has access to information and opportunities that previous generations could only dream of. However, mobile phones and the internet promote short attention spans – when this is coupled with the natural human desire to find the path of least resistance, it could potentially lead to very poor personal and financial decisions.
Moreover, our tendency to want things quickly will further worsen the outcome. There are very few shortcuts to learning, growing and making solid long-term investment decisions. All require time and patience.
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