In the third instalment of our biases series, we are asking: why do we believe fake news? Why do we believe stories or things that aren’t necessarily true?
There are some biases we need to consider to answer these questions. First of all, there is
incentive bias. This is the reason behind why people have certain opinions, or say certain things. For example, real estate agents might tell you the markets are about to go up. Mortgage brokers might tell you that you need to refinance your home. Financial planners might tell you that you need a financial planner (and you do, according to us!) A barber might tell you that you need a haircut. If you’re at the races with a mate, and they bet on a horse, they want everyone to bet on that horse too, so they feel better about their decision. It comes down to incentives and emotions – these have a huge bearing on why people think the way they think, or give certain advice.
The second is
hindsight bias. This is when we look back to the past and think that things were more predictable than they actually were. Think back to 5 years ago – were you in the same job? Same financial situation? Could you have predicted where you’re at now? Most likely, you couldn’t. But it’s easy to look back and think that you could. We are often over-confident in our ability to predict the future. Take the GFC for example – people were reluctant to invest more money when the markets were low. Lots of shares were sold. There was a lot of panic as markets dropped by 57% at times. But as things started getting back to normal, people realised they shouldn’t have panicked. It’s easy to think ‘
I wish I had made X decision’. So what we actually need to do is always have a margin of safety around our decisions. That way, even if things don’t go quite to plan, you will be okay. And get comfortable about the fact that you won’t always know what’s coming.
Next up, we have
self-serving bias – this is when we attribute good outcomes to skill, and bad outcomes to luck. A classic example is horse racing or gambling. If I win, I am a genius. If I lose, it’s the jockey’s fault – or the horse wasn’t trained well enough. This is our subconscious mind trying to protect us. Sometimes, when things go well, it is simply pure luck – and vice versa. We recommend trying to remember why you're making a decision in the first place – for example I want my $500,000 in super to grow to $1.6 million for my retirement. We have a long-term goal, but we need to remember there will be short-term volatility. It’s important to keep this in mind because in 6 months’ time the balance might have dropped, and that’s okay.
Finally, we have
narrative fallacy – we think everything has to fit into a story. People often see themselves as the star of a movie (and this is especially true for kids!) Life can seem like a movie to us, we think everything fits into it and we are the stars. But sometimes things are just pure luck. It’s easy to make any decision fit into a narrative, for example ‘
I must have done something wrong because this bad outcome happened’ instead of saying ‘
there are a lot of random outcomes in the world, this is just one of those outcomes.’ We often hear people say
‘I’m not good with money.’ This is a very common narrative – but it is counterproductive. They are convincing themselves of this story. Instead, they could try saying ‘
I've made some poor choices in the past.’
What’s the take home message? Focus on being rational and be aware of when you've fallen prey to these biases. Look back at your past decisions – were they good or bad, and why?
And remember: not all good decisions are rewarded, and not all bad decisions are punished.
Listen to the related podcast here!