September 20, 2016

Wealth Management for Women: What Makes a Great Advisor? Part 1: Avoiding Confirmation Bias

Written by Andrew Hunt

Twice a week. Always twice a week.

Neither the oppressive heat nor the insufferable humidity hindered my mom from insisting that the lawn be mowed twice a week.

I had always assumed my mom had a good reason for wanting the lawn to be mowed that often. Perhaps it had something to do with the health of the grass. Maybe it was a strategy to ward off insects. Did it have something to do with water conservation? I was never brave enough to ask, but as I grew older, I figured that twice-weekly mowing made the grass healthy. After all, our yard always looked great!

Fast-forward to my mid 20’s, when I became a homeowner. I was so excited to begin my own twice-weekly mowing ritual for optimal lawn maintenance.

By this time, my parents lived in a villa-type neighborhood where lawn care was included in the monthly association fee. Apparently, the lawn wasn’t mowed twice a week there, because my father revealed to me that he still mowed. “You know how much Mom loves the lines in the grass,” he said.

All this time – all this time! – I had assumed that twice-weekly mowing was part of some larger program with some greater purpose, not something my father did just because my mom liked the lines in the grass! Indeed, I had been the victim of my own confirmation bias.

Confirmation bias is the natural tendency to use new information as confirmation of existing beliefs or theories. For more than 20 years, I thought I knew why lawns should be mowed twice a week. In fact, I had that idea only because I hadn’t asked the right questions and had never looked for information to the contrary.

Confirmation bias is at work in all our lives, and very often it colors the way we invest. We have a tendency to create a theory about an investment opportunity, and then we are drawn to content that confirms our theory.

In an article titled “A Behavioral View of How People Make Financial Decisions,” Keith Redhead explains that investors make financial decisions through a series of biases that shape our perceptions and motivations. Once we have a frame of reference for a decision – especially a decision that involves costs – we engage a part of our brain that encourages us to stay with the status quo. According to Redhead, even after we make a decision to move in a different direction – for example, to buy or sell an investment – we might not follow through with that decision because confirmation bias can lead our brains to overemphasize the case against change. This can be very costly for investors!

A great investment advisor will challenge your natural biases and present information that convinces you to consider the alternatives. But simply shedding light on a conflicting point of view is not enough. Once you have decided to make a change, the natural bias toward the status quo will fight against your motivation to implement the change. Your advisor should keep you accountable, ensuring that you carry out the change you decide to make. After all, a plan is only as good as its execution.

Hiley Hunt Wealth Management is a Registered Investment Advisor dedicated to serving women who are responsible for their household investment portfolio. We would love to connect with you to discuss how we can help you meet your financial goals. To learn more about how we work with our clients, please visit hileyhunt.com/what-to-expect.