In a recent speech, Charlie Ellis, founder of the international consulting firm Greenwich Associates, shared the challenges 401(k) participants face in becoming better investors. As outlined recently in Think Advisor, Ellis cited survey data which indicated that 80% of people think they’re above-average investors. He shared the following false signals that lead to that conclusion:
- Confirmation bias. We actively seek and retain information that confirms what we already believe.
- The “our crowd” effect. If our friends believe what we believe than we all must be correct.
- Hindsight bias. In hindsight, it really wasn’t our fault. We attribute bad investment outcomes to things we can understand rather than to unpredictable market events.
- Failure to admit defeat. We don’t cut our losses early. Once an investment decision is made, we like to see things through. We fall in love with some of our investments.
- Fight or flight reactions. We let emotions drive our most important investment decisions.
