Status Quo Bias Can Paralyze Us
Our final personal finance bias is known as status quo bias. As the name suggests, this bias causes an investor to prefer the current state of affairs. Also known as “investment inertia”, this psychological trap can allow investing mistakes to perpetuate and losses to mount. This behavior is closely aligned with loss aversion, the bias we discussed on July 6. Our preoccupation with avoiding losses and not admitting mistakes causes us to do nothing when corrective actions may clearly be warranted.
Novice investors often display status quo bias. Many will state, “I don’t know what to do, so the easiest thing is to do nothing.” However, experienced investors must also guard against status quo bias as they may realize that they have made a mistake but be unwilling to admit to it. Successful investors continuously re-examine their earlier thought processes and ascertain what market changes may have taken place. Likewise, they evaluate their investment theses on an on-going basis and accept the fact that in an uncertain world, events don’t always develop as anticipated.
Status quo bias also calls to light the possible need for seeking professional advice. Financial advisors are trained to develop a better understanding of the financial world than the average person. Likewise, many advisory firms incorporate pre-established processes such as periodic portfolio rebalancing which can counteract status quo bias. This is not to suggest that good investing requires continuous changes and portfolio modifications. Rather, it is pointing out the importance of well-established practices such as asset allocation and risk mitigation in improving outcomes for investors.
If you would like to learn more about these and other wise financial planning moves, please contact us through our Level 5 Financial LLC website or via phone at 719-323-1240. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.