How to Overcome Bias in Financial Advice (2024)

FAQs

How do you overcome bias in finance? ›

Advisors might be able to counter overconfidence bias by encouraging clients to make room for other perspectives. A “premortem” strategy may also help clients take a more measured approach to making financial decisions.

Examples of confirmation biases

If a friend told you that Gold is always better than Equity and believed it, you may look at returns over the periods where Gold outperformed Equity and feel confident about your friend's opinion. You would ignore the period where Gold underperformed Equity.

Practice self-awareness: Regularly assess your confidence levels and question your beliefs, assumptions, and biases to keep them in check and prevent overconfidence from clouding your decision making. Emphasize risk management: Focus on managing risk in your investment strategy rather than trying to maximize returns.

Investors should be aware of their own tendency towards confirmation bias so that they can overcome poor decision-making, missing chances, and avoid falling prey to bubbles. Seeking out contrarian views and avoiding affirmative questions are two ways to counteract confirmation bias.

Focus on falsification bias – Confirmation bias can be a strong influence, so you will need to actively look for evidence that disproves your point of view. Get a different perspective – Get out of your echo chamber. Approach someone you know sees things differently from you and ask them what they are seeing.

Confirmation bias: Arguably the most common example of an unconscious bias, confirmation bias refers to the inclination to conclude a situation or person based on your beliefs, desires, and prejudices rather than their character, behavior, and unbiased merit.

Example: Confirmation bias During presidential elections, people tend to seek information that paints the candidate they support in a positive light, while dismissing any information that paints them in a negative light.

Be realistic rather than optimistic. Have an open mind: Be willing to admit your weaknesses and consider the possibility of making mistakes. Reflect on your mistakes: Spend time thinking about what you could have done differently and how you can improve in the future.

What solutions can be used to control overconfidence? ›

Comprehensive research and assessment of factors affecting markets or a security's price are necessary to eliminate anchoring bias from decision-making in the investment process.

Protecting against the Representativeness Heuristic

You may want to consider keeping an investment diary. Write down your reasoning and then match it to the outcomes, whether good or bad.

Egalitarian funding

Using this method, resources would be evenly divided among researchers rather than distributed through peer-review. Here, there would be no bias in direct decision making about funding because decisions would not be 'made' in the same sense as before.

Guarding Against Framing Bias

Consider rephrasing the information you're reading and see what impact, if any, that has on your conclusion. The key thing is trying to kick in the logical, reflective approach to decision making and avoid impulsive, reflexive decisions.

There are several techniques and strategies that may help you avoid self-attribution bias in trading. For example, keeping a trading journal, sharing your trading experience with other traders, seeking out alternative explanations, using a variety of different sources and setting goals.