Why You Need To Be Aware of Mental Biases

We all have biases that restrict the way we manage and profit from our savings. The way we think and the mistakes we make are studied by behavioural scientists and it is important to be aware of these challenges when we are making investment decisions.

The first bias we need to address is the tendency to see something as more probable if it is easier to imagine. Let’s say that you are looking for insurance to protect against a terrorist attack during a business trip to the east coast. You are quoted for two policies, each has the same premium.

Policy 1. Protects against a terrorist attack involving the destruction of major infrastructure in New York State.

Policy 2. Protects against a terrorist attack in the USA.

The best choice is the second policy. But in reality, many people are attracted to the first policy as they can imagine the attack and the consequences. The technical term for this is conjunction fallacy and it was first detailed by Amos Tversky and Daniel Kahneman.

In future blogs, we will cover further biases.