Have you ever made an impulse buy? When you immediately bought an expensive item without weighing its value or necessity?  

A moment of weakness can lead to rash decisions—and we tend to regret them afterward. That is behavioral bias, or what seems smart at first can end up working against you down the line.

When making major financial decisions, it is important to be aware of our biases before making a move. A well-considered decision helps you avoid costly mistakes and get the best financial returns.

What is behavioral bias?

A behavioral bias, also known as a cognitive bias, is an error that occurs when our thinking is influenced by how we see the world, rather than by facts. They are predictable patterns that influence our decision-making, leading us to make irrational choices.

Behavioral bias can impact our financial decisions significantly. Experts in behavioral finance study how psychology shapes investor decisions, because even the most seasoned investors aren’t immune to bias or irrational thinking.

The deeper we understand behavioral biases, the more equipped we are to deal with them, so we can make smarter financial choices.

What are some examples of behavioral biases?

Identifying the different types of behavioral biases can help minimize their impact on your decisions.

● Herd Behavior – Have you ever been convinced to do something simply because “everyone else is doing it?” That is herd behavior—moving with the crowd without doing your own due diligence. Like herds, individuals follow the majority, often at the expense of independent thinking. Remember to conduct your own research before investing your hard-earned money.

● Attentional Bias – Attentional bias leads investors to fixate on easily accessible information while overlooking what truly matters. During the 2021 GameStop frenzy—a retail investor-driven short squeeze in the US that shook Wall Street[PM1] [PM2] —many people chased headlines and hype without examining the stock’s fundamentals, leaving thousands stuck with overpriced, underperforming shares once the excitement faded.

● Loss Aversion – Investing always involves risk, and hesitation is natural. But excessive caution can backfire. Loss aversion—the tendency to cling to poor investments to avoid losing money—can prevent you from reallocating funds to better opportunities, costing you potential gains.

● Fear of missing out (FOMO) – From a financial perspective, FOMO happens when an investor is worried about losing out on a potentially lucrative investment. If you dive into major investments driven by FOMO without doing your homework, you might end up exposed to unnecessary risk.

● Experimental bias – Experimental bias happens when your recent memory of events makes you think that the event will more likely happen again, leading you to miss out on other opportunities. This creates a false sense of success – the market doesn’t always perform in the same way, so investments don’t always meet expectations. It may leave you disappointed when reality doesn’t match the forecast.

How can we deal with behavioral bias?

Awareness is the first step to dealing with behavioral bias. Once you recognize signs of behavioral bias, you can take a step back and reassess your financial behavior.

● Do your research – Most behavioral biases stem from accepting readily available information without digging deeper. By consulting multiple sources, you equip yourself with the insight needed to make sound, informed decisions.

● Remember your own risk appetite – You begin investing by determining your risk-return profile. What is your current financial situation? How much are you willing to invest, and for how long? Having answers to these questions can help you set a map for your investment journey.

● Focus on your long-term goals – Having a long-term investment horizon can help you focus on the big picture and avoid panicking over potential losses. Remember that long-term investing helps you build wealth more steadily and can generate substantial returns over time.

● Seek professional guidance – Reach out to a licensed financial advisor who can help you choose the right financial solution. They understand the market and will recommend products that can be tailored to your unique needs. Investment-linked insurance plans, for example, provide access to well-diversified funds that are professionally managed by world-class global asset managers, ensuring your investments are in expert hands. With the trusted stewardship of AIA Investments, you can navigate behavioral biases more confidently and stay focused on building your financial future.

Behavioral biases affect everyone – but you can stay ahead by staying informed, keeping your long-term goals in focus, and seeking expert advice when needed. Are you ready to make sound financial decisions and know your options? Talk to an AIA Life Planner today.