The 2021 Dalbar study showed investor biases about doubled in costs to 2,11%. COVID-19 created extreme volatility − one of the greatest market crashes followed by one of the greatest bull runs. Recency biases grew to 58% from 35% (2020) and confirmation biases doubled to 50%!
The Investments and Wealth Institute, together with Cerulli Associates (sponsored by Schwab), recently released their annual behavioural finance (BeFi) survey (Q2 2021). It showed that COVID-19’s unprecedented social and economic stresses are playing more than ever on investors’ behaviours.
Recency biases topped the list, affecting nearly 60% of investors (Millennials (<40) − 78%); Generation X (40−55) – 74; Baby Boomers (56–74) – 58%; the Silent Generation (75+) – 75%).
Second came confirmation biases, doubling to 50% − Millennials being the highest (66%) and Baby Boomers the lowest (49%). Framing, familiarity and loss aversion biases all jumped dramatically, from the mid-25% to mid-45% range.
Ultimately, all investors were impacted.
COVID-19’s impact on economies, companies and social behaviours (including vaccinations, lockdowns, etc) has been emotionally and intellectually exhausting. Experts abound. Science and data are fielded in extraordinary volumes. The media are having a field day. Family and friends hotly debate COVID-19. Investment markets have reacted wildly. Is it any surprise then that our emotions are extreme?
BeFi can help
Amidst all of this, BeFi techniques grew: they are focused on longer-term views and integrated goal-based planning systematic processes, and are cautioning investors to stay calm.
- Stock markets will succeed where investors generally fail.
- Markets may be rational but investors aren’t.
- Whatever your age group, investment expertise and experience, we are all human.
- Humans have behavioural biases whether we know them or like them or not.
- Financial advisors using BeFi techniques and tools can make a difference.
- The Top 5 benefits in the survey were strengthened trust; relationships and client retention; keeping clients invested during periods of volatility; reducing short-term or emotional decision-making; improving the management of client expectations; and helping clients make financial decisions and prioritise.
Regency bias versus confirmation bias
- Recency bias − Investors favour recent events above historical ones. If markets are rising, they will continue to do so, and vice versa in a bear run. This encourages more emotional investing − hold on too long, exit too soon, and ‘time’ the market.
- Confirmation bias − Investors look to or interpret information confirming their beliefs: they discount information contrary to their views. It’s what I want to hear.