In today’s fast moving world of 24 hour news and internet reports of economic upheaval and falls in the stock markets, how are you supposed to protect your investments from yourself and control your irrational tendencies?

The first step is to accept you have them (we all do, undisputable psychological research proves it). Secondly learn which ones apply to you and then finally either stop using them or use them to your advantage.

Many investment products that we use on a day to day basis are stock market related. These include pension funds, Individual Savings Accounts (ISAs), unit trusts, and investment bonds. We also know that stock markets can be very volatile on a day by day and intraday basis.

Therefore when investors, individual and professional, do not control their irrational tendencies it can cost them a lot of money if they react to this volatility in an illogic (human) manner.

We are human and therefore tend to use our quick automatic thinking brain developed over millions of years rather than our logical brain, like Spock (from the TV show Star Trek).

When being approached by a lion or seeing a child run in front of your moving car you really do not have to time to use your logical brain and ponder the options, so in those examples our automatic brain is very useful. However when reacting to the falls in the stock market or recently reported financial calamity this automatic brain can be quite a nuisance leading us to run or screech to a halt (which are the correct actions when dealing with the lion or the child but not the stock market).

Psychological research has defined these irrational tendencies as biases. These biases can have implications for the decisions we make when we invest or influence us when deciding to remain invested. For ease of reading I have removed the sources of research as well as the actual research and academic notes however I have provided details of further reading material that covers this subject at the end of this book.

As a financial adviser I have studied these psychological biases and how they apply to real investors and how we can manage our misjudgements that arise from them.  I believe by learning and understanding these psychological biases, to which we are all prone, we all may be able to compensate for them and use our logical brain when making investment decisions.

The most common psychological biases that affect investors and financial advisers include:
• Overconfidence  “thinking you can beat the market”
• hindsight bias  “investing using the rear view mirror”
• representativeness  “finding patterns and information to confirm you are correct”
• conservatism   “being unwilling to change your mind”
• status quo bias   “becoming attached to investments”
• narrow framing  “focussing on short term volatility”
• Loss Aversion  “only playing to win”
• Group Think  “following the herd”

In the following weeks I will discuss and describe each in turn and the ways they can damage our wealth.