As a veterinarian, your expertise extends far beyond the world of animal health. Often, you must manage your personal finances effectively to secure a stable and prosperous future. However, like everyone else, you are susceptible to behavioral biases that can influence your financial decisions. Recognizing these biases is crucial in making informed choices to safeguard your financial well-being. In this article, we will explore the five most common behavioral biases that affect personal finances decisions, accompanied by relevant examples.
Confirmation bias is the tendency to seek out information that supports pre-existing beliefs and opinions, while ignoring or dismissing evidence that contradicts them. In the context of personal finances, this bias can manifest when researching investment opportunities, financial products, or money-saving strategies.
For example, you may have a strong belief in the long-term potential of a specific investment, such as investing heavily in stocks of a particular pharmaceutical company that develops animal medications or even in the stock of your current practice if you work for a corporate practice. Due to your optimistic outlook, you may actively seek out positive news, earnings reports, and expert opinions that validate your belief in the company’s future success. At the same time, you may overlook or downplay negative news or potential risks associated with the investment, such as regulatory challenges or shifts in market trends.
To overcome confirmation bias, it is advised to adopt a more balanced approach to information gathering. Seeking out diverse perspectives and considering both positive and negative factors before making financial decisions can lead to more informed choices.
Loss aversion refers to the tendency to strongly prefer avoiding losses over achieving gains of an equal magnitude. Veterinarians, being compassionate individuals who often deal with life and death situations in their professional lives, may be particularly susceptible to this bias in their personal finances.
For instance, you may have invested a significant portion of your savings in the stock market, and when market volatility hits, you may experience a sharp decline in the value of your portfolio. Fearing further losses, you might be inclined to sell your investments prematurely to avoid additional losses, even if the market has a high probability of recovering over time. This reactive behavior can lead to missing out on potential long-term gains and negatively impact their financial goals.
Studies show that psychologically losing $100 is equivalent to gaining $250, meaning the hurt from loss is 2.5X greater than the pleasure from gain.
To counter loss aversion, focus on long-term financial planning and maintaining a diversified investment portfolio. Understanding that market fluctuations are natural and that investments should be aligned with long-term financial objectives can help mitigate the influence of loss aversion.
Anchoring bias occurs when individuals rely too heavily on the first piece of information they receive when making decisions. In personal finances, you may anchor your perception of an asset’s value based on its initial cost or value, even when market conditions have changed significantly.
For example, you might have purchased a piece of real estate many years ago for a relatively low price. As property prices rise over time, you might believe that the property is still worth the original purchase price, despite the current market value being much higher. This anchor can lead them to resist selling the property or considering its current market value in their overall financial planning.
To counteract anchoring bias, you should regularly review and reevaluate their financial assets, considering current market conditions and updated valuations. Being open to adjusting their financial decisions based on current information can lead to more accurate and beneficial outcomes.
Herding behavior occurs when individuals follow the actions of a larger group, often influenced by social pressure or the fear of missing out on potential gains (remember GameStop, anyone?). Veterinarians, like many other professionals, may experience herding behavior in their financial decisions.
For example, during a period of strong market increases, when many colleagues and friends are actively investing in a particular asset class or stock (like crypto!), you might feel compelled to join in on the trend to avoid feeling left out. This rush to invest without proper research or consideration of individual financial goals can lead to impulsive decisions and expose you to unnecessary risks. These types of investments are not necessarily unwise, but highlights the need to research and understand how the investment fits into the overall financial plan.
To resist herding behavior, focus on maintaining a disciplined financial plan tailored to your unique circumstances, risk tolerance, and objectives. Seeking advice from qualified financial professionals can also provide valuable guidance to help avoid impulsive decisions based on social influences.
Overconfidence bias refers to individuals’ tendency to overestimate their own abilities and knowledge. A perfect example is this 2018 study from AAA that found that 80% of drivers think they are above average, which of course is mathematically impossible.
Veterinarians, given their extensive expertise in their field, might believe that their financial acumen matches their professional skills, leading them to take on higher risks or complex financial strategies without fully understanding the potential consequences.
For instance, a veterinarian who has consistently achieved success in their professional life might assume they possess the same level of expertise when it comes to managing their investments actively. This overconfidence can lead them to trade frequently, speculate on individual stocks, or invest in sophisticated financial products, all of which can result in losses.
To counter overconfidence, recognize the limits of your financial expertise and seek professional advice when making complex financial decisions. A prudent approach to investing, focusing on diversification, and aligning investments with long-term goals can help avoid the pitfalls of overconfidence. This is not to say all financial planners know more than you, or that you should not question another professionals advice, but simply to illustrate that many times overconfidence can lead to a narrow focused approach to personal finances.
Understanding these five common behavioral biases—confirmation bias, loss aversion, anchoring bias, herding behavior, and overconfidence—can empower veterinarians to make more rational and objective financial decisions. By being aware of these biases and adopting strategies to mitigate their influence, veterinarians can secure their financial well-being and work towards achieving their long-term goals. Seeking assistance from financial advisors or certified professionals can be valuable in developing a robust financial plan and navigating the complexities of personal finance.
Andrew Langdon is a CERTIFIED FINANCIAL PLANNER™, CERTIFIED Student Loan Professional™ and the founder of VetWorth, a fiduciary fee-only financial planning firm dedicated to serving the unique needs of veterinarians and their families.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Andrew Langdon, and all rights are reserved. Read the full Disclaimer.