6 Ways to Prevent Biases in Financial Decision-Making

Our minds take shortcuts when we make decisions. For example, when we aren’t sure what to order for take out, we head to online ratings for decision-making help. Usually these shortcuts are for the better — they help us react quickly and manage thousands of decisions made throughout the day.

There are times, however, that mental shortcuts lead us astray — that’s when they become biases.

The complexity of our finances means that many of the shortcuts we use in every day life can take us down the wrong path when we think about money. Even more so when we’re stressed, distracted, unsure and anxious — as many of us are today.

There’s no way to erase our biases, but we can use tested techniques from behavioral science to prevent them from affecting our decisions.

Here’s a checklist with some straightforward behavioral strategies that can strengthen the decision-making process when it comes to investing.

1. Get to know your biases. Research shows that understanding our biases can help us spot them in our decisions. Take some time to read about the psychology behind our decisions and emotions. It’s not that you personally have a problem, we all make poor decisions sometimes. It’s useful to understand the larger role our biases have in everyday decisions about our lives and finances.
2. Turn down the noise. Reading or hearing about a frequent price change can put any investor on edge. Set a schedule for how often you check your portfolio to “turn the volume down” on the noise. The schedule should focus on the long-term performance of your investment and progress on your goals, not on daily changes.
3. Create speed bumps for decisions. Sometimes the only thing we need to make a good decision is time, but it can be tough to slow down when our emotions are running awry. To help avoid a hasty decision, try setting up a decision-making speedbump. One such speedbump could be creating a three day wait roll, when you can’t react on a decision for three days.
4. Reconnect with your goals. If you start to feel anxious about your finances, take a break from day-to-day market performance and check in on your financial goals. Reacquaint yourself with what your goals are, why you set them in the first place and how your current financial strategy can help you reach them.
5. Be your own devil’s advocate. If you’re starting to lean toward selling an investment, ask yourself why someone else might buy that same investment. Our minds have an easier time remembering and noticing facts and ideas that support our opinions. Forcing ourselves to take a different perspective before acting can reveal every angle of a decision.
6. Thoughtfulness matters. It’s extremely hard to stay calm and wait out the storm when your portfolio is losing value. We all have a tendency toward action. Don’t suppress this urge, redirect your efforts. Opportunity can abound during market volatility, and this could be a chance to rebalance your portfolio. When stock are down and bonds are up, you can maintain your asset allocation by selling high and buying low. You can also increase your savings rate to take advantage of market weaknesses — like tax-saving opportunities or capitalizing on low interest rates.