77 – Bias

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Episode Overview:

Bias can appear in all areas of our life, not just race or prejudice. Ken first defines it and then frames it in the context of finance, going on to explain how it can negatively affect your finance. Take for example recency bias, which can skew your perception of future market performance. Ken delves further into these bias’ and the mistakes that it causes. Listen in to this episode as Ken helps ground you in reality and encourages you to make informed decisions – bias free.

Transcriptions are auto-generated, please excuse grammar/spelling!

Happy day to you. This is Ken Kaufman. And I am thrilled you’re here for Episode Number 77 titled Bias. Now, I’ve been thinking a lot recently about this word of bias and what it means and how it can show up in kind of really all areas of our lives not just in terms of, you know, race or prejudice, at least in terms of with, you know, a lot of the things that are happening in our society today and a lot of the things that are coming to light. And so as I thought about this word, I wanted to just set some context and then go through why bias, if it’s not put in check and it’s not managed properly, it can hurt us financially on actually multiple levels.

So let’s just start. And I realized this is gonna be a little bit cliche for me to just jump right in and read a definition to you but I think it’s helpful to put in context and then talk through a couple of examples. So in the dictionary, it says that bias is prejudice in favor of or against one thing, person or group compared with another usually in a way considered to be unfair. So with that as the background, this concept that it’s when we’re taking something that’s happened to us, and it creates a bias for us, for some reason we’re looking through a lens that doesn’t see all of the truth. It’s maybe reacting from an emotional perspective or sometimes past experience perspective and we’re taking that and we’re casting whatever that is on to an entire group as if, you know, all of them are guilty of it.

And by the way, bias it can be maybe over aggrandizing or saying, you know, some group is better than they are and it can swing the other way and say, well, some group or something, or, you know, some person is bad. So I’ll give you an example here that I’ve thought I could share. I know that lawyers tend to get a bad rap and there are lots of jokes about them and those kinds of things. The interesting thing is, is that really it’s a form of bias that occurs in our society that says that they’re all bad. And what that means is somebody at some point had a bad experience with one or two, and then they…that somehow become, you know, the rule and really it’s not true.

I’ve known a lot of attorneys who are very good. And in fact, the interesting thing is some people could be biased and say attorneys are so amazing because I’ve had great experiences with some lawyers and felt very well served and like they really did a good job taking care of what my interests were and representing that. And on the flip side, I have had some bad experiences too but if I’d only had good experiences, I could say, oh, wow, all lawyers are great or I will say all lawyers are bad. You know, in the financial world, you could say all CFPs are bad, certified financial planners, or all stockbrokers are bad and they’re greedy, and they just want to take your money or they’re all good, all CEOs of big companies are bad or they’re good.

And the interesting thing is as soon as we find ourselves saying something like them, those people, people in general do this or do that, we’re starting to reflect bias. One of the most common at least that I find that I am guilty of, and I think as a society just as human beings were this way is something called recency bias. And recency bias says that whatever has happened to me most recently is going to create a lens through which I look at what’s happening to me currently.

Now, in the financial world, the stock market, it goes up, it goes down, there’s good news, there’s bad news, there’s strong earnings, there’s poor earnings, there’s high unemployment, low unemployment, all of these different things that are driving things from an economic perspective and you see the stock market go up and down. And our recency bias would say if the market’s been going up recently, we tend to get a little overconfident because we’re like, wow, the stock market goes up and we start to cast a bias on the market and put this lens that we look through that says, well, it doesn’t go down ever and it just keeps going up and up and up and look how amazing it is.

But you can see really quickly how that’s very dangerous because markets go up and go down. I mean, this year has been a great example. We started off the year in a relatively good spot, then the market went way down, then it’s come back up, then here recently, it started to go back down and there’s a lot of negative news. And I’ll tell you since the year 1995, I have been working in finance at some level or studying it in school, and I was a brokerage trader for Fidelity back as I was going through school and put myself through school that way and then worked for another broker-dealer, and so on and so forth. And then I ended up getting into the business side and growing in corporate finance.

But the interesting thing here, and the point that I’m trying to get to is, the markets go up and they go down, yet where we make the biggest mistakes is when we don’t look at the big picture and realize you know what? At some points, the market’s good, the market’s bad and plan accordingly and invest accordingly, we can get ourselves in big trouble. Example number one, the market’s going up, yeah, it’s so great and it doesn’t go down, recently I’ve just seen my portfolio get more and my 401(k) balance get more and, you know, I can’t be beat here. And then we start putting more money into the stock market that is money that maybe we need in a year or two or three that is, you know, for more immediate expense, not necessarily retirement or, you know, saving for something for the long term and then all of a sudden the market goes down.

And we were so confident that we took money that couldn’t handle a downturn and that might be down for 5 or 10 years before it comes back up and ultimately can create a good return for us over a period of time, it causes big issues and this recency bias can cause us to be overconfident. Likewise, if the market’s been going down and down and down and you’re seeing your 401(k) balance or your stock portfolio or whatever it is that you have and it’s going down, down, down, down, we start to think I’ve got to get out and this is dangerous, and I’m losing all my money and the stock market’s gonna go to zero, and this is a horrible thing that’s happening. Well, at some point that turns back up.

And a lot of times this recency bias causes people who have a lot of money invested to get very nervous if there’s a drawdown in the market of say, 10%, 20%, 30%, 50%. You see your $100,000 portfolio drop to $50,000. And what happens with recency bias is it motivates us to get out when it’s down there low. And then over the next year, 2 years, 10 years, the market goes back up, and all of a sudden you got out when it was worth $50,000, if you’d stayed in it would have turned back up, gotten to $100,000 and kept going but now you have $50,000 sitting in cash, and you’re thinking well, when should I put this money back in?

So I’m sharing these examples not to, you know, point out fault or bring shame to anyone or make anyone feel bad but just to call out that we need to understand our bias and we need to keep ourselves in check. And the way we keep ourselves in check is to just keep saying, wait, am I over assuming that this group of people or that this market, or that these financial instruments or these other things are all going to do one thing, and it’s just consistent, and I can predict it? It’s just not true. If 50% of people are good, it means 50% of attorneys are good people, and they’re gonna do their best.

And my belief is that it’s a lot higher of the population that’s good at heart and wants to try to do good and be good in the world and, you know, add value and contribute and all of those things. But moving from that tangent, the point here that I want you to take in is check your bias. Do not allow yourself to make decisions, especially financially, or organize your financial plan and execute on different elements of it and handle your investment strategy from a perspective of bias and the way you do it is you put a plan in place, and you stick to the plan.

I love Paul Merriman’s content around how to invest in the market and those things and he has what he calls the ultimate buy and hold strategy. And he is adamant with this buy and hold strategy that you buy and hold and you don’t get out and you go for the long haul. And then over time, you can make your portfolio, you can tilt it more towards fixed income or to less, what you’d call risky or volatile assets. And that whole strategy is mechanized, meaning the decisions are made and there’s…you know, the timing is clear. And the mentality here is you buy and hold and you do not make changes unless it’s part of your strategy regardless of what’s happening in the outside world, regardless of what’s recently happened especially or what your recent experiences have been with one thing or one person or another.

So this is my key takeaway is keep the bias in check and the way you do is have an analytical, well thought out, non-emotional plan that is helping you move toward your goals and objectives and you do not deviate regardless of what’s happening around you, regardless of what the news media says about the stock market’s going down, or it’s going to go up or these different things. Because I’ll be honest with you, there’s many people each day saying it’s gonna go up as it go down, and at the end of the day, they don’t know. Nobody knows. And in your financial plan, there’s very, very similar elements there. So I hope this has been helpful.

This episode is about keeping our bias in check, not making decisions based on especially what’s happened to us recently, but really putting in check all of our biases to allow us to execute on our plans and really win at the game of finances. And the beautiful thing here is and you know I preach this is you get to define what success is. You get to figure out what you’re shooting for or where you’re trying to go and then you put that plan in place. Do not let bias hurt you. Don’t let bias come in and be a lens through which you look at things, and then you miss out.

Again, hope this has been helpful. Many, many thanks to you for joining today. This is a wrap for Episode 77. Happy day.

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Join Chief Financial Officer Ken Kaufman as he helps you track and hack your net worth. For those seeking financial independence, your net worth is one of the most significant measurements of success. Using his two decades of financial experience, Ken Kaufman helps you overcome your financial obstacles and look onward towards a better, brighter financial future.

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