Do you suffer from bias?

If you’re one of the 681 readers of this newsletter, it’s likely you’re either an investor, an operator, or a family member I forced to sign-up (thanks for everything Mom!)

Regardless of what segment you fall into, strong decision making is an essential part of your world.

Investors need to understand what’s impacting their decision to buy the stock, or to invest in the business.
Operators need to understand what’s driving their decision to adjust their sales structure.
My family needs to make the decision to not unsubscribe from my newsletter.

While data can drive decisions, human behavior is important and decision making is rarely rational. Life is like a big game of poker. Data can tell you if your hand should win, but the other players are big variables that you can’t control.

I was first introduced to biases when I started my career. One of my mentors talked me through some of the major biases to watch out for. I deepened my understanding of the common behavioral biases during the studying for the CFA exam. There are lots of different biases that can impact behavior and decision making.

I wanted to talk you through the five biases that impact me the most. Whenever I need to make a big decision, I run through these biases to ensure they’re not impacting my judgment.

1. Loss Aversion

Definition: When you fear a $100 loss more than you appreciate a $100 gain.
How this has impacted me: When trading FX, I made a big mistake and lost a lot of money. I was rattled. I almost didn’t come into work the next day. When I generated the same amount of revenue on other days, I didn’t think twice.
How I watch out for it: This bias pops up anytime risk is involved for me. I know I’m risk averse and so need to slow down during these decisions and make sure I’m not overweighting the downside.

2. Outcome Bias

Definition: Judging an investment based on the outcome of another investment.
How it impacts me: Unfortunately, Twitter makes it harder to ignore this bias. People are sharing the wins from all different investments they make. If I see someone doing well in single family rental, I want to be there even if it’s not a good investment for me. If I see someone do poorly on an SMB deal, it makes me want to do fewer SMB deals.
How I watch out for it: This is where having a personalized investment checklist is essential. It prevents you from judging results based on the performance of others. Instead, you’re judging the outcome based on the information and criteria you have going into the investment. Want to see my deal checklist? Check it out here. Want to see how I use decks to help prevent bias in my investment process. Check it out here.

3. Illusion of Control

Definition: The belief that you can control (or influence) the outcome more than you actually can.
How it impacts me: This is one of the key challenges when working at a private equity fund. You believe the results will be directly due to the decisions you make. In fact, you’re much more removed than you’d think and a large part of the returns come from market conditions.
How I watch out for it: When thinking about what is going to drive performance, I like to put things in two categories: What I control and what I can’t control. I may be able to improve a company’s accounts receivable and pricing, but I won’t be able to fix market growth or what competitors are doing.

4. Recency Bias

Definition: Overweighting recent news and information and ignoring a larger dataset.
How it impacts me: I’ve always dabbled in crypto as a long-term investor, but during the crypto boom in 2021, I put a few thousand dollars in more speculative bets in the crypto space based on short-term data. Those few thousand dollars quickly became zero dollars.
How I watch out for it: This is one of the reasons I always move slowly when investing or making big decisions. When you’re in a rush, you tend to look at a much more recent data set. In addition, it’s always helpful to talk to people who were making similar decisions 5-10 years earlier so you have a better understanding of the overall data set.

5. Confirmation Bias

Definition: Focusing more on the evidence that further supports your beliefs.
How it impacts me: While following individual stocks during my family office job, I noticed I only read articles that were positive about the names I liked or negative about names I didn’t like. I read earnings transcripts the same way. I made a few big mistakes this way and ended up costing my employer a lot of money.
How I watch out for it: When researching a business or any other challenge, I create a pros and cons list and write everything down. After completing the research, I review the complete list and I find it’s easier to get an overall sense of what’s important regardless if it aligns with my original point of view.

Everyone has different biases. Figure out what are the largest factors influencing your decision so you can come up with strategies to ensure you’re making the right decisions. Be patient with yourself too. Remember that you’re either winning or learning.