Human Factors Investing
Over my 20+ years in this industry, and four significant bear markets, I understand what it is that I really do for clients that they cannot do themselves: I help them act rationally when most investors are acting irrationally. The experience of many investors can be summarized as many months or even years of portfolio monotony, interrupted by brief periods of intense worry or fear. It is during these brief periods that my most important work is done with clients.
Click below to learn about human factors in investing:
Simply put, human factors make it easier for people to do the right thing, and harder for them to do the wrong thing. For investors, it is easier to do the right thing in difficult moments if you have been educated on human factors and the psychology of investing BEFORE you experience your first episode of irrational exuberance during a bull market or a large sell-off in a bear market.
While I came across human factors during my scuba diving training, this concept is more well known in aviation and medical settings, where they similarly involve safety checklists and the design of systems that are insulated from going wrong due to human error and emotion. Properly designed and applied, they have been proven to dramatically reduce the incidence of mistakes. We can apply these principles to investing also.
Sometimes, an even bigger hurdle than portfolio design is the six inches between one’s ears! And here is where human factors for investors become relevant.
No matter how well informed you are about investment markets, you are still human! You experience emotions that have nothing to do with solid evidence and don’t make it easy for you to make rational decisions at times. The human instinct to react quickly is not usually helpful in the investment world, where cooler heads prevail, and often, doing nothing is the best choice.
We feel that managing human factors (our emotions, which can lead to doing the wrong thing at the wrong time) is the greatest role we have, and the most significant way to add value to a portfolio. Information is ubiquitous today, and it is hard to demonstrate a reliable way to have better access to information with which to construct a portfolio from. But, by managing and improving human factors in investing, we can increase your chances of financial success by making it easy for you to do the right thing at crucial times.
In aviation and healthcare, training is done to help ensure the right course of action is taken in the event of an emergency.
In aviation, 80% of accidents are caused by pilots making mistakes, not by major malfunctions of aircraft systems. Pilot training focuses specifically on teaching individuals, in a simulated environment, to make the correct (best) decision to avoid disaster. These correct actions have been engrained through many hours of flight simulator training.
In healthcare, human factors help to understand many of the contributors to adverse events. This knowledge can facilitate the design of better systems and procedures to prevent or mitigate harm to patients. Whether it is avoiding drug interactions or saving a patient’s life on the operating table in the event of an unplanned event mid-surgery, checklists and evaluations can address the complexity of human behaviour and create experiences that are both seamless and safe.
A financial plan is our flight simulator or checklist. Together, we can analyze what might lead to the failure of your financial plan and implement portfolio rules to reduce the likelihood of running out of funds in your lifetime.
To learn more about financial planning and portfolio rules, contact Brian today.