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Behavioral Investing

3 Steps to Harness Your Human Biases

When human behavior gets in the way of making good decisions, it’s important to know how to recognize—and overcome—these tendencies.

Co-workers sitting in a line.

We’re all human, with common emotions, traits and tendencies—although we express them in our own unique way. Behavioral expert, author and Harvard professor Cass Sunstein shares three steps that can get these things working in your favor.

1. Appreciate Your Humanity

Start with a simple yet profound premise: acknowledge the reality of human behavior.

“I am human. Therefore, I am vulnerable to a variety of biases, from present bias (being influenced by what happened recently), to unrealistic overconfidence, to loss aversion.”

It’s important to be aware of your own tendencies.

For example, being loss averse (something that affects many of us when markets are down or inflation runs hot) can cause problems in the long run. You might get upset at the idea of a small loss and not very excited at the idea of a bigger gain. And if you filter decisions through a lens of loss aversion, you can miss out on opportunities.

2. Make a Checklist

Create a list of what you need to consider before you decide on a course of action. Include things such as:

  • What do I want or what do I need?

  • What are the alternatives?

  • What are the costs?

  • What are the benefits?

A focused list of considerations can help you sort through your options and so you can make a more informed decision for your future.

3. Create a “Pre-Commitment Strategy”

That's just a fancy term for a plan where you commit to a certain course of action during a future period. The idea of a pre-commitment strategy is often the best insulation against the effects of psychological biases. It gives you a framework as you plan for the future, with inherent flexibility in case of market volatility.

Put Your Humanity to Work for You

No one is immune to behavioral biases, but knowing they exist—and how they can affect you—can help you use the ones that work for you and watch out for those that can get in your way.

Get more tips and insight on inflation.

Behavioral content Cass Sunstein ©2024 All Rights Reserved

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.