Have you ever wondered why some of your big decisions don’t pan out the way you expect? Maybe you planned to retire early but are now realising it’s a bit trickier than you thought. Or perhaps you bought a house in an area you loved, only to find it wasn’t the best financial move. These hiccups often boil down to something called behavioural bias. Let’s dive into how these biases can affect your personal goals like retirement, home buying, career moves, and lifestyle choices—and what you can do about it.
What is Behavioural Bias?
Behavioural bias is basically when our brains take mental shortcuts based on emotions, past experiences, and even gut feelings, rather than logical thinking. It sounds harmless, but these biases can lead us astray, especially with important decisions.
Common Behavioural Biases and Their Impact
1) Overconfidence Bias
Have you ever felt so sure about something that you didn’t even bother to double-check? That’s overconfidence bias at work. You might think you’re a stock market whiz after a couple of lucky picks and plan your retirement around this belief. But overestimating your knowledge and skills can lead to some costly mistakes.
2) Confirmation Bias
This is when we only pay attention to information that confirms what we already believe. Say you’ve always wanted a house in a particular suburb. You’re so focused on making this dream come true that you ignore red flags like high property taxes or poor resale value.
3) Recency Bias
Ever made a big purchase right after a promotion, thinking your new income level is here to stay? That’s recency bias. We give too much weight to recent events, like a pay raise or a good month in the stock market, and make decisions that aren’t sustainable in the long run.
4) Affect Heuristic
We often make decisions based on how something makes us feel. If a career opportunity feels right because it’s something you’ve dreamed of, you might jump in without considering practical aspects like job security or work-life balance.
5) Loss Aversion Bias
Most of us hate losing more than we love winning. When it comes to retirement planning, this might mean avoiding necessary investment risks because we’re scared of losing money, even though playing it too safe can hurt us in the long run.
Everyday Examples of Behavioural Bias
Imagine you’re thinking about your future and decide that real estate is the way to go for your retirement nest egg. This idea gets a boost every time a friend shares a success story about their property investments (confirmation bias). But focusing only on real estate could make you miss out on other investment opportunities, like stocks or superannuation, which might offer better growth and diversification.
Or think about your career. Have you ever felt stuck in a job and decided to switch because you were bored (recency bias)? The excitement of a new role can be intoxicating (affect heuristic), but if you don’t consider factors like company stability or the commute, you might end up trading one problem for another.
How to Mitigate Behavioural Bias
So, how do we tackle these sneaky biases? Here are a few tips:
- Seek Diverse Perspectives: Talk to friends, family, or professionals who can offer different viewpoints when you’re making big decisions. They might see things you’ve missed.
- Reflect on Past Decisions: Look back at some of your major decisions and identify any patterns. This self-reflection can help you spot and avoid biases in the future.
- Set Clear, Objective Goals: Be specific about what you want to achieve. Instead of saying, “I want to save for retirement,” try “I want to save $500,000 by age 65.” Clear goals make it easier to stay on track.
- Educate Yourself: Keep learning about personal finance, career planning, and goal setting. The more you know, the better equipped you’ll be to make informed decisions.
- Think Long-Term: Always consider the long-term implications of your decisions. A choice that feels good now might not be the best for your future.
Conclusion
We all fall prey to behavioural biases, but recognising and addressing them can help us make better choices aligned with our personal goals. Whether you’re planning for retirement, buying a home, advancing your career, or making lifestyle changes, understanding these biases can help you avoid common pitfalls and achieve your dreams more effectively.
Remember, the key to overcoming behavioural bias is awareness, education, and a willingness to seek diverse perspectives. By doing so, you’ll be better equipped to navigate the complexities of decision-making and stay on track to achieving your personal goals.
If you’re interested in learning how a Financial Adviser can help you achieve your lifestyle and financial goals, check out our Goal Assessment & Financial Planning page for more information.
Any advice on this site is general nature only and has not been tailored to your personal objectives, financial situation and needs. Please seek personal advice prior to acting on this information. Any advice on this website has been prepared without taking account of your objectives, financial situation or needs. Because of that, before acting on the advice, you should consider its appropriateness to you, having regard to your objectives, financial situation or needs.
