Perception biases

Your brain takes shortcuts. Most of the time, they help. With money, they mislead. Here are five.

First: anchoring. The first number you see shapes the next ones, even if it has nothing to do with them.

In nineteen seventy-four, the psychologists Tversky and Kahneman spun a rigged wheel. It stopped on ten, or on sixty-five.

Then they asked what share of UN countries were African. Those who saw ten answered around twenty-five per cent. The others, around forty-five.

On the stock market, the anchor is often the purchase price. Bought at one hundred euros, a share seems cheap at eighty. The market ignores your price.

Second: availability. What we remember easily seems likely to us.

After a crash that makes the headlines, many judge a new crash imminent. After calm years, they forget it.

The risk has not necessarily changed. The memory has.

Third: survivorship bias. We only see those who remained.

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Say one hundred funds launched ten years ago. The worst were closed, or merged into others. Sixty are left.

Rankings only show those sixty. So the average displayed is better than what savers actually lived through.

Same for famous entrepreneurs or millionaire traders. Losers do not give talks.

Fourth: framing. The same information, put differently, does not produce the same decision.

Ninety per cent survival, or ten per cent mortality. It is exactly the same thing.

Yet in a study from nineteen eighty-two, even doctors chose surgery more often when told about survival.

In finance, "this fund gains three years out of four" reassures more than "it loses one year in four".

Fifth: confirmation. We look for what proves us right, and avoid what contradicts us.

You bought a share. The optimistic articles, you read to the end. The others, you skim.

Result: the more you read, the surer you are. Without being better informed.

These five biases have one thing in common: you cannot feel them. Nobody thinks "I am anchored".

Knowing them is not enough to make them disappear. But you can build safeguards.

Against anchoring: ask whether you would buy today, at today's price, forgetting your purchase price.

Against survivorship: ask how many funds disappeared. Against confirmation: read the opposite view first.

Against framing: turn the sentence around. If the decision changes when the sentence changes, the sentence was deciding.