This week we are going to examine what is known as Self-control Bias.
According to Michael M. Pompian, author of Behavioral Finance and Wealth Management, “Simply put, self-control bias is a human behavioral tendency that causes people to fail to act in pursuit of their long-term, overarching goals because of a lack of self-discipline. Money is an area in which people are notorious for displaying a lack of self-control.”
So how can self-control bias impact investors? Pompian list the following four mistakes investors can make with this bias.
- Self-control bias can cause investors to spend more today at the expense of saving for tomorrow. This behavior can be hazardous to one’s wealth, because retirement can arrive too quickly for investors to have saved enough. Frequently, then, people incur inappropriate degrees of risk in their portfolios in effort to make up for lost time. This can, of course, aggravate the problem.
- Self-control bias may cause investors to fail to plan for retirement. Studies have shown that people who do not plan for retirement are far less likely to retire securely than those who do plan. Studies have shown that people who do not plan for retirement are also less likely to invest in equity securities.
- Self-control bias can cause asset-allocation imbalance problems. For example, some investors may prefer income-producing assets, due to a “spend today” mentality. This behavior can be hazardous to long-term wealth because too many income-producing assets can inhibit a portfolio to keep up with inflation. Other investors might favor different asset classes, such as equities over bonds, simply because they like to take risks and can’t control their behavior.
- Self-control bias can cause investors to lose sight of basic financial principles, such as compounding of interest, dollar cost averaging, and similar discipline behaviors that, if adhered to, can help create significant long-term wealth.
Let us help you eliminate this bias. Professional advisors with disciplined systems of investing tailored specifically to your investment goals will allow you to overcome many of the obstacles inherent in our very nature. At DWAM, we can help.