Behavioral biases are among the most common drivers of investment missteps. The most common culprit? Being easily influenced by recent news events or experiences, according to new research sponsored by Charles Schwab Investment Management (CSIM) in collaboration with the Investments & Wealth Institute.
That specific bias — dubbed “recency bias” — was cited by 35% of advisors polled for the BeFi Barometer 2019 survey as a behavioral bias affecting their clients’ investment decisions, the companies said Monday. It was followed by loss aversion bias (playing it safe or accepting less risk than can be tolerated), cited by 26% of advisors.
Rounding out the top five were confirmation bias (clients seeking information that reinforces their perceptions) at 25% and familiarity/home bias (a preference to invest in familiar, especially U.S.-based companies) and anchoring bias (a tendency to focus on specific reference points when making investment decisions) at 24% each.
But the survey results indicated that vulnerability to specific behavioral biases varies by client age. Advisors surveyed said they observed framing bias (making decisions based on the way information is presented) to be the most common bias among millennials, while recency bias was the top one among Generation X, anchoring bias was the top one among baby boomers and familiarity/home bias was the top one among the older silent generation.
For the study, more than 300 financial advisors were surveyed in July for CSIM and Investments & Wealth Institute by Cerulli Associates, the companies noted, adding those polled came from wirehouses, RIAs and national/regional broker-dealers.
Investors are often convinced that what happened yesterday will happen tomorrow, Scott Smith, director of advice relationships at Cerulli, noted during a briefing with reporters to discuss the study’s findings. Meanwhile, “partisanship just isn’t for politics anymore,” he said, noting investors often “look to sources they think [are] going to back them up” and prove they’re right about their own opinions.
It wasn’t clear how much of a role political biases might impact investment decisions and Cerulli didn’t specifically ask advisors about them, he told ThinkAdvisor. But he said such biases are likely pretty much covered by the biases Cerulli did ask the advisors about.
Meanwhile, one reason it doesn’t logically make a whole lot of sense to make investment decisions based on events that just happened is that, these days, “every day we seem to have a new normal,” such as low interest rates currently, according to Omar Aguilar, chief investment officer of Equities and Multi-Asset Strategies at CSIM.