3 ways to fight bias and focus on your long-term financial goals

A global pandemic sure is stressful. And stress, whether we realize it or not, naturally puts our brains into “fight or flight” mode. Also known as the acute stress response, fight or flight is a dramatic psychological reaction to anything we find mentally or physically threatening. It creates physical responses that divert all of our attention and ability to addressing the immediate need of whatever is scaring us.

Fight or flight helped us evolve as humans. It worked really well when, say, our ancestors long, long ago were out picking berries and came across a sabretooth tiger. It refocused all our power from beneficial, longer-term needs (gathering food so we could eat later) to life-saving, short-term needs (not being attacked by said sabretooth tiger).

In the modern world, fight or flight manifests differently. It still has the same essential temporary effect if our lives are threatened — which is good. But as we cope with the inundation of anxiety-inducing information and re-learning social behaviours during a pandemic, over time it adds small increases to our stress response that don’t subside — which is bad.

Unless we’re aware of it and intentionally take actions to calm back down, we can develop into a state of fight or flight even though there’s no immediate physical threat. This perennial state of heightened stress disrupts everything from our ability to fall asleep to failing to remember what’s on our grocery lists. One of it’s more hidden and particularly detrimental effects is that it makes it extremely difficult to keep our eyes on the prize of our long-term goals.

Because our bodies are physically primed by a constant state of low-level stress it feels difficult, even impossible, to think strategically about what will benefit us tomorrow when, in a very real way, all of our mental energy is focused on surviving today.

There is still a ton of uncertainty about how COVID-19 will continue to affect us. When it comes to investing, putting down our credit cards and shuffling extra cash into our RRSP can feel challenging enough on a regular day. So what do we do when we’re balancing our financial futures with the everyday ups and downs of unemployment, isolation and shifting bank balances during a pandemic?

One thing that is certain — whether personal or financial, we’ll experience traumas that can make it easy to lose our long-term investment focus. When we’re aware of our most common default biases, we can prepare ourselves to think more critically and act in ways that trump our fight or flight tendencies. Here are some simple, research-based techniques we can use to stay on financial track whenever those inevitable sabretooth tigers get in the way.

Recency Bias

Our brains are always doing things to try and make our lives easier. Most of the time this works really well, but sometimes it backfires. Recency bias is a cognitive trait that leads us to put more importance on recent events than historic ones. This is particularly relevant when we’re in fight or flight mode: If the danger is immediate then the most effective way to address the threat is within the context of whatever is happening around us in that same moment.

When it comes to investing, recency bias can make people prone to making short-sighted, emotional decisions that will cost them earning potential in the long run. When markets go down and we get stressed, recency bias tells us the only information to react to is what is happening right now and that we should act immediately.

The cure to recency bias is historic data. For more mainstream, long-term investors, over longer time horizons they’ll come out on top by keeping their money where it is even during market downturns. Talk to your financial advisor about how your investments and markets overall have performed over decades, not weeks, and make decisions based on what’s happened historically.

Availability Bias

When it comes to our memories, it’s often easier to remember shocking, one-of-a-kind events than mundane, every day ones. This is nice when it comes to remembering your wedding more than your afternoon commute, but it’s less helpful when it comes to planning for your financial future thanks to availability bias.

Another psychological phenomenon, availability bias leads us to believe that the first things we think of in relation to an event are more representative of the truth than what might actually be the case. It’s a frequent disruptor to critical thinking, and helps lead us to make emotionally-charged decisions over practical, truth-based ones.

Our brains do this to make it easier for us to make quick decisions — another situation that’s exacerbated when we’re stressed out — but it also leads us to avoid doing actual research and increases the chances that our decision making will be based on quickly available, but flawed information over doing the longer work of uncovering what is actually true. It distorts our perceptions of real risks and can make it much harder to make critical decisions.

Availability bias is made worse when the situations we’re evaluating are more recent (hello to our new friend, recency bias) and also when attached to a really dramatic, exciting narrative — something like the sudden arrival of a global pandemic.

In the last few months, availability bias might have encouraged you to make short-term financial plans because of its immediacy paired with how big and shocking it all felt. Perpetuated by media overexposure and social media scrolling, the availability of recent, sensory-overloading pandemic information will feel more important in the last few months than the previous slow, steady performance of the market for the last few years.

Confirmation Bias

Everyone likes to be right, right? It feels good, boosts confidence and makes our opinions feel validated. And that’s exactly the problem. Confirmation bias is particularly tricky to recognize and root out, because by its nature it leads us to search out and identify with information that will automatically agree with whatever we want to believe. We probably don’t even know when it’s happening.

Like with the first two biases, confirmation bias can grow more stubborn when connected with emotional topics. The more deeply we feel about a topic, the more likely we are to pick and choose information that backs up what we already believe. When we’re stressed out, who’s got time to risk having to absorb new information and potentially change?

Working with a financial advisor is a common way to address your own confirmation bias. If you typically follow particular leaders and new sites, try reading advice from someone completely different. You don’t have to act on it immediately, but if you have a strong reaction of thinking “This is wrong!” take a moment to ask yourself why you think it’s wrong. If you can prove that your counter-opinion is based on factual data, that’s a good sign you’re on the right course. If you’re only able to use your own opinions as the basis of your opinion (and are only supporting it from the same resources you’ve used before) you could be falling victim to your own confirmation bias.

No matter the situation, evidence-based decision making can be tricky. Our investments and financial wellness are closely linked to our emotions and self-esteem, and that’s okay. In times of great stress and upheaval, being aware of our own cognitive biases can help us remove some of the temporary emotional stress in financial planning and help us feel calmer, more aware and prepared to stay committed to long-term plans.

Jeremy Elder is a Toronto-based content marketer and copywriter with over a decade’s experience telling stories for some of the world’s biggest brands. He’s an expert at finding WiFi wherever you least expect it.

Jeremy Elder is a paid Sonnet spokesperson.
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