shaw gibbs - accountants and business advisers
accountants & business advisers

Article

Totally addicted to bias

Article

Totally addicted to bias

22 Nov 2022

3 minute read

I’ll admit that drum and bass is more a genre of music that my children appreciate, but it was either this or “a buttery biscuit bias” and I just couldn't bring myself to go that far!

Totally addicted to bias - news article image

I’ll admit that drum and bass is more a genre of music that my children appreciate, but it was either this or “a buttery biscuit bias” and I just couldn't bring myself to go that far! 

Bias, and mitigating it’s effects, has a big part to play in financial planning and there are so many types of bias; we deal with Recency bias, the belief that something which has happened will happen again soon (beloved of fund managers when they have a good year because they know it will bring in money over the next year regardless of how well they perform); Survivorship bias, where investment expertise may appear to exist on the basis of data which ignores those investments that have failed along the way; Confirmation bias, where one pays most attention to information which confirms our belief and ignores information which contradicts it. 

One advantage of working within the wider Shaw Gibbs practice is that we have the ability to be challenged by those that aren’t financial planners but are experts in related disciplines, such as corporate finance or accounting. This enables us to search out checks on our own bias and hopefully avoid some of the mistakes that come with them. 

One of the most interesting forms of bias is Hindsight bias. Hindsight as we all know is perfect, 20/20 vision and if we could only bottle it and turn it into foresight then everything would be great. Hindsight bias is more subtle, and it is the misconception that, looking back, one knew at the time what was going to happen and could have done something about it. This is not the same as actually having had an idea but not acted on it because of time or financial constraints but is the view that all the signs were there and everyone knew it was coming and so did you if you think about it. 

Hindsight bias is particularly pernicious because it feeds into Overconfidence bias, the belief that we are better than we are; this showed up well in a study in 2006 which found that 74% of investment market analysts believed themselves to be above average, with the remaining 26% believing that they were average – a mathematical impossibility. 

If we take as an example our decision to exclude Gilts from our portfolios, hindsight now proves this to be an excellent decision. However, it was a decision taken in 2013 not 2021, based on a long-term view of Gilts as an asset class and an acceptance that we had no idea how long it would be before the value came out but simply that it would at some point. Confirmation bias plus Hindsight bias might tell us that we called the market right however, the truth is that we did what we aim to do, make medium to long term decisions based on medium to long term assumptions.

What can be interesting when dealing with hindsight is not just the way that Hindsight bias persuades us that we have a special insight into the investment world and just need to start to act on our instincts, but also how we view differently the results of actual decisions that we have made. The temptation to see decisions that turn out to have correct short-term impacts as our ability to pick or time things, whereas decisions that turn out to have poor short term impacts are just unlucky, is all too strong. Reality however is that what turns out to be a good decision will probably have as much to do with luck as what turns out to be a bad decision and where there are exceptions to this rule, they are few and far between. 

So, accept that hindsight is perfect and foresight flawed, remember as many of the bad decisions as you do the good and don’t be tempted to put good decisions down to skill and bad ones down to fortune.

Need expert advice?

Speak to an expert for advice on
+44-1865 292200 or get in touch online to find out how Shaw Gibbs can help you

Email
info@shawgibbs.com

Need expert advice?

Speak to an expert for advice on
+44-1865 292200 or get in touch online to find out how Shaw Gibbs can help you

Email
info@shawgibbs.com

What our clients say

  • I have been a client of Shaw Gibbs since the 1960's and have always found a professional but friendly response from the partners or staff

    I have been a client of Shaw Gibbs since the 1960's and have always found a professional but friendly response from the partners or staff

    Richard Preston

  • Thank you for being such a great partner in building our business!

    Thank you for being such a great partner in building our business!

    Oege de Moor - CEO, Semmle

  • Experience, expertise and support was not only invaluable from a financing perspective, but also in assisting us to determine the future strategy.

    Experience, expertise and support was not only invaluable from a financing perspective, but also in assisting us to determine the future strategy.

    Charles Parry – John Parry Estates Ltd

  • Shaw Gibbs’ service provides timely expertise at a reasonable cost

    Shaw Gibbs’ service provides timely expertise at a reasonable cost

    OATS Limited

© 2022 Shaw Gibbs Ltd

Your registration