Behavioral Biases

May 2016 //
Behavioral Finance

Over the years, we’ve written about numerous behavioral biases that work to rob investors of their desired investment success.  Here are two interesting (and related) biases, according to behavioral scientists:  The first is known as “present bias.”  This occurs when investors place a very high value on the limited rewards of today’s purchase of some of the smaller comforts in life—at the expense of the ability to purchase much larger amounts of life’s comforts over time through investing.  The second bias is called “exponential-growth bias,” which refers to a lack of understanding/ appreciation of how much compound returns … well, compound over time.  Working together, these two biases result in a lot of disappointed people come retirement time.  Indeed, a study by the National Bureau of Economic Research (NBER) concluded that these and other behavioral biases have cost Americans about $1.7 trillion.  That’s about $5,300 for every man, woman and child in the country.  While most investors, by nature, are less susceptible to present bias and exponential-growth bias, many Americans are affected by them.  The NBER study concluded that fully 55% of Americans are “present biased” on money matters.