Individuals must recognise and do their best to mitigate certain inherent behavioural biases when investing, a senior funds management executive has said.
According to Fidelity International cross-asset investment specialist Anthony Doyle, one of these such biases investors need to manage is confirmation bias.
“[Confirmation bias is when] we seek out views that are similar to our own,” Doyle told delegates at the recent Australian Shareholders’ Association Conference 2021 held in Sydney.
“This has been exacerbated by social media with people being shown things that only reconfirm their own preconceived views.
“Ideally what we want to do in making a decision is try to incorporate different views [using] all types of information available, even if they test our own views.
“One of the best things you can do as an investor is test your investment thesis. Often we’ll find people who reconfirm our investment thesis, but what if it goes wrong? What if we are wrong? What is the likelihood of loss? At what point would we sell this investment?”
He pointed to other factors investors needed to be conscious of when looking to make portfolio allocations.
“Be aware of sunk costs where we’ve already invested a lot of time, effort and maybe even capital in a decision and we’re fearful of saying no because we may potentially lose the time and money that we’ve already spent on getting to this point of the decision [-making process],” he said.
“You’ll seek out people that reconfirm some of your beliefs and values and it’s often very useful to challenge those perceptions and views.
“Think about avoiding this bias by incorporating those views and thinking about what could be one of the scenarios that may differ from your own thesis.
“So review your investments from first principles.”
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