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By Dr. David Edward Marcinko MBA MEd CMP™

SPONSOR: http://www.MarcinkoAssociates.com

As, as human beings, our brains are booby-trapped with psychological barriers that stand between making smart financial decisions and making dumb ones. The good news is that once you realize your own mental weaknesses, it’s not impossible to overcome them. 

CITE: https://www.r2library.com/Resource

In fact, psychiatrist and medical colleague Wes Boyd MD PhD MA related the following mind-traps and investing impediments that have yet to be appreciated by the financial planning community writ-large:

• Anchoring happens when we place too much emphasis on the first piece of information we receive regarding a given subject. For instance, when shopping for a wedding ring a salesman might tell us to spend three months’ salary. After hearing this, we may feel like we are doing something wrong if we stray from this advice, even though the guideline provided may cause us to spend more or less than we can afford. Ditto for buy / sell stock recommendations without our own due diligence.
• Myopia makes it hard for us to imagine what our lives might be like in the future. For example, because we are young, healthy, and in our prime medical practice earning years now, it may be hard for us to picture what life will be like when our health depletes and we know longer have the earnings necessary to support our standard of living. This short sighted thinking makes it hard to save adequately when we are young, when saving does the most good.
• Gambler’s fallacy occurs when we subconsciously believe we can use past events to predict the future. It is common for the hottest sector during one calendar year to attract the most doctor investors the following year. Of course, just because an investment did well last year doesn’t mean it will continue to do well this year. In fact, it is more likely to lag the market.
• Avoidance is simply procrastination. Even though you may only have the opportunity to adjust your health care plan through your employer once per year, researching alternative health plans is too much work and too boring for us to get around to it. Consequently, we stick with a plan that may not be best for us.
• Loss aversion affected many investors during the stock market crash of 2008. During the crash, many doctors decided they couldn’t afford to lose more and sold their investments. Of course, this caused the investors to sell at market troughs and miss the quick, dramatic recovery.
• Overconfident investing happens when we believe we can out-smart other investors via market timing or through quick, frequent trading. Data convincingly shows that people who trade most often under-perform the market by a significant margin over time.
• Mental accounting takes place when we assign different values to money depending on where we get it from. For instance, even though we may have an aggressive saving goal for the year, it is likely easier for us to save money that we worked for than money that was given to us as a gift.
• Herd mentality makes it very hard for humans to not take action when everyone around us does. For example, we may hear stories of people making significant profits buying, fixing up, and flipping homes and have the desire to get in on the action, even though we have no experience in real estate.

CMP: http://www.CertifiedMedicalPlanner.org

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Filed under: "Ask-an-Advisor", CMP Program, Ethics, Experts Invited, Health Economics, Investing, Touring with Marcinko | Tagged: Anchoring, avoidance, Certified Medical Planner™, CMP, david macinko, herd mentality, investing mind traps, loss aversion, Marcinko Associates, mental accounting, myopia, psychological risks |