{"id":59019,"date":"2023-09-09T17:57:00","date_gmt":"2023-09-09T21:57:00","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/13-cognitive-errors-you-may-be-making-when-thinking-about-money\/"},"modified":"2023-09-09T17:57:03","modified_gmt":"2023-09-09T21:57:03","slug":"13-cognitive-errors-you-may-be-making-when-thinking-about-money","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=59019","title":{"rendered":"13 Cognitive Errors You May Be Making When Thinking About Money"},"content":{"rendered":"
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People are not always rational agents. We all make mistakes \u2013 this is what makes us human. However, for the longest time, economic theory has made assumptions about behavior in financial markets based on human behavior being rational. Because of this gap between theory and reality, Behavioral Finance, which focuses on the influence of psychology in the decision-making process of investors, has become an integral part of financial planning. This discussion will touch on the 13 cognitive errors you may be making when it comes to your finances, how they can affect your investments, and how to avoid them.<\/p>\n

1. Illusion Of Control<\/h2>\n

With this bias, you believe you can control the outcome of an event you have no control over. World-diversified portfolios can offer diversification and potential return benefits to investors but maybe you believe you should only be investing in the United States because as a resident, you believe you have more control over how those companies do.<\/p>\n

2. Money Illusion<\/h2>\n

You would think that money holds the same value today as any time in the past or future. It fails to factor in inflation or returns. I see this a lot when people try to come up with a \u201cmagic number\u201d to live on in retirement, thinking that if their expenses are $100,000 today, getting an income of $100,000 per year in retirement in 20 years could support them.<\/p>\n

3. Hindsight Bias<\/h2>\n

You tend to remember times you were correct and discount your errors. This frequently happens with investors who try to time the market. You might say, \u201cI knew things were going bad in 2008 so luckily, I got out of the market,\u201d neglecting to mention the years you stayed in cash and missed out on significant gains.<\/p>\n

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4. Conservatism Bias<\/h2>\n

You form a rational view based off the information you have but fail to adjust that view or integrate it with new information as it becomes available. I see this a lot with real estate investors who continue to think that massive leverage will serve them well in a high interest rate environment after 10 years of lower rates.<\/p>\n

5. Confirmation Bias<\/h2>\n

You seek ways to validate your current beliefs, even if they are wrong. Example:<\/p>\n