How emotions & biases affect our finances
Stan Clark talks about how we built our approach and philosophy on the lessons of behavioral finance
How Emotions & Biases Affect Our Finances
[Upbeat Music}
[Stan Clark
Portfolio Manager & Senior Wealth Advisor
CIBC Private Wealth – Wood Gundy]
One of the most fascinating things ever to happen in economics was when an
ingenious psychologist decided to study it.
Hello. My name is Stan Clark.
[How Emotions and Biases
Affect our Finances.]
Today I’d like to talk about how emotions and biases affect our finances. In 2002 a
Psychologist, Dr. Daniel Kahneman, won the Nobel Prize in economics for, quote:
[having integrated insights from psychological research into economic science,
especially concerning human judgment and decision-making under uncertainty.]
having integrated insights from psychological research into economic science,
especially concerning human judgment and decision-making under uncertainty.
Kahneman actually created a new discipline, Behavioural Finance.
He, and others since, have repeatedly shown that when it comes to matters of
economics, finance and investing, people, including professionals make systematic,
repeated mistakes, are seldom aware of their mistakes and fail to learn from them.
[Behavioural finance can help us avoid the mistakes and benefit from the mistakes of
others.]
Becoming more familiar with Behavioral Finance can help us avoid these mistakes, and
benefit from the mistakes of others.
Kahneman’s major discovery was that emotions and cognitive biases have far-reaching
effects on our judgments and decision making. No matter how smart, educated or
professional you are, emotions and biases affect everybody because they’ve been hard
wired into our brains over millions of years of evolution.
Research has documented a host of ways our normally helpful intuitions hinder good
judgment.
[Image of a crystal ball with a line graph inside of it.]
First, we tend to be far too confident in our predictions and the predictions of others.
[Image of a side car mirror with the text “objects in mirror are closer than they appear”.]
Accurate forecasting is extremely difficult and sometimes impossible, but we have a
“hindsight bias”.
[Image of several books lined up on a shelf.]
This makes us believe the past was more predictable than it actually was, and it
prevents us from learning from history.
We naturally place much more weight on recent events and personal experiences. This
is another reason we never seem to learn from history.
[Image of a man in a suit on all fours with his head in the sand.]
We selectively filter and process information. We see what we want to see, and often
ignore uncomfortable facts.
[Image of an anchor being pulled by a rope shaped as a brain.]
Our intuitions are poor at estimating probabilities, are strongly affected by what we’ve
been anchored on, how things are framed, or what we’ve been repeatedly exposed to,
all of which distort our judgments.
We’re overly influenced by small numbers of observations and see patterns and causal
relationships where none exist.
[Image of 3 children reading a book with a teacher.]
And we’re much more influenced by anecdotes, narratives and stories than by facts,
figures, and statistics.
[Images of a man standing in front of a large chalk board filled with equations and
graphs.]
This causes us to be persuaded by a good story, even when the numbers don’t add up.
Humans are the most social animal on earth and are uncomfortable going against the
crowd.
[Image of penguins on an iceberg jumping into the water, following the lead penguins]
So, we often get swept along with it, even when the crowd is going where it shouldn’t.
[Image of a cartoon heart and brain icons on opposite sides of a scale. The brain icon is
slightly higher than the heart.]
Often our rational brain makes up arguments, so we’ll believe what our intuitions want
us to believe.
[Image of a lawyer in a courtroom making a statement.]
Some of the smartest people make the biggest mistakes because they think behavioral
finance doesn’t apply to them and they are very creative at rationalizing and coming up
with arguments to justify their preferences.
The consequences of our all-too-human tendencies are significant, especially when
dealing with our finances and investments. Behavioral Finance is a huge and important
topic that affects us all every day. It’s a fascinating area and its teachings form the
foundation of everything our team does for you.
I invite you to learn more about Behavioral Finance and how our team uses our unique
financial planning, asset allocation and rules-based investing strategies to grow and
protect your wealth. You can find more about these, including summary videos on each
by Sylvia, Tom and Mike on the “Our Perspectives” section of our team’s website.
And please contact us by phone or email if you would like to discuss how any of this
applies to your specific situation.
[CIBC Private Wealth consists of services provided by CIBC and certain of its
subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. The
CIBC logo and
“CIBC Private Wealth” are trademarks of CIBC, used under license. “Wood Gundy” is a
registered trademark of CIBC World Markets Inc.
This information, including any opinion, is based on various sources believed to be
reliable, but its accuracy cannot be guaranteed and is subject to change.
Stan Clark is an Investment Advisor with CIBC Wood Gundy in Vancouver. The views of
Stan Clark and third-party references do not necessarily reflect those of CIBC World
Markets Inc.
If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.]