Commentary

Biases Don't Make Investors Foolish

Steve Wendel

Confirmation bias. Herding behavior. Loss aversion. Anchoring. The field of behavioral finance is perhaps best known for the laundry list of investor biases that researchers have documented. These cognitive biases push investors to make common mistakes when it comes to investing: overtrading, chasing returns, running from a down market, and so forth. The research can give the impression that investors are simply foolish and should not be trusted with their money. As a behavioral scientist, I want to dispel that view. It's dangerous to our understanding of investing and can make it harder for investors to succeed.

On Hamburgers
Here's an example I use to explain to advisors and other industry professionals what the biases of investing really are. Imagine you're in the mood for a burger (or your favorite food). When it comes to buying hamburgers, there are some simple, straightforward rules we use to pick burgers that we're likely to enjoy even before we eat them.