How We Manage Bias in Our Practice

Reducing the impact of bias on financial decisions is proven to improve the reliability of decisions and the repeatability of investment performance. That is why it is critical that we not only encourage our clients to adopt strategic habits to help them to reduce bias in their financial choices but also imperative that we guard against bias in our investment practice.

That is why we use a structured approach developed over a wide array of market conditions and honed over the last 30 years. We manage each of our mandates using quantitative security selection and tactical rebalancing. Even after we select a security, we continue through a procedure flow-chart before investing. Similarly, when a security is no longer suitable for the mandate, we sell it regardless of the price.

In addition, we maintain a rigorous investment plan and diary of investment decisions. Keeping a log allows us to evaluate our trade decisions, recall our strategy over the security's time horizon, and avoid hindsight bias.

From a client perspective, we collect and maintain rigorous notes and scheduled activities to meet each client's needs and objectives. We also develop an Investment Policy Statement for every client. An Investment Policy Statement (IPS) provides the framework for managing your portfolio, setting the strategic asset allocation, investment strategy, and other measured parameters to align with your investment objectives and risk profile.

You can find out more about when to trust expert advice and which biases can be controlled in Unbiased Investor: Reduce Financial Stress & Keep More of Your Money (2022)

 

Habits You Can Adopt to Reduce the Effect of Bias

The animated G.I.Joe mini-series, A Real American Hero, ran during the mid-1980s. The popular half-hour program follows an elite team of soldiers as they battle the evil Cobra organization in its quest for world domination. After each episode, a public service announcement (PSA) notoriously ran, in which a G.I.Joe hero saves a viewer-age kid from trouble. The children found themselves caught in scenarios such as their clothing on fire, about to leave with a stranger, or lying to a friend. In ech case, the G.I. Joe imparts words of wisdom, telling the children what they should do to avoid these risk in the future. Invariably, the children respond, "Now we know!" And the soldier responds, "And knowing is half the battle."

Every parent understands, however, that telling a child not to play in the street or to heed some other advice only goes so far. Similarly, you likely know that you should save more money each month, spend within your limits, and stay invested in the market even when it drops to disheartening lows. Yet, executing those plans when they count is difficult. You may plan to lose weight, but when you’re invited out for dinner at the new French restaurant in the city, that commitment is hard to maintain.

 

Now that you are aware of how and when biases affect your choices, you may believe that you are less susceptible to these influences. Understandably, awareness of how biases impact your decisions provides a feeling of confidence that you’ll make better decisions in the future. If your confidence leads you to believe that awareness is enough to prevent recurrence, however, you’ve fallen prey to yet another bias, aptly called the G.I. Joe Fallacy.

 

The only way to correct for these influential biases is to adopt new habits. To do that, you need to know what habits are effective and how to implement the necessary safeguards for when, inevitably, old patterns arise. The following sections outline many of these practical habits that you can adopt for that very purpose.

All new clients receive a copy of Unbiased Investor: Reduce Financial Stress & Keep More of Your Money, by Coreen T. Sol, CFA (Wiley, 2022). You can also purchase copies of Unbiased Investor at your favourite bookstore or download a free copy of Unbiased Habits Checklist. 

 

How to Develop Your Personal Economic Values (PEV)

Your personal views are the principles that guide our decisions regarding spending, saving for retirement, and investing in the future. Taking the time to consider your Personal Economic Values (PEV) can help you set more achievable and meaningful financial resolutions for the new year that align with what's important to you.

In Chapter 4 of Coreen's book, Unbiased Investor, you can follow the eight steps to guide you through the process.

The first step poses specific questions to get you started. These questions are specifically designed for beginning the framework to discover what matters most to you financially and how those values should shape your decisions in the future.

The steps that follow are designed to evaluate your beliefs about money, your underlying motivations, how you prefer to manage risk, and what is holding you back from reaching your goals. You will also reflect on the impact of culture, gender, and generational patterns on your financial decisions. The process culminates with creating a Personal Economic Value statement to remind yourself why each decision matters and how it should be aligned with your values.

Clients will receive a complimentary copy of Unbiased Investor: Reduce Financial Stress & Keep More of Your Money (2022) You can purchase additional copies at your favourite bookstore, and download the 8-step workbook to develop your Personal Economic Values free of charge.