Five Ways to Strategize Your Behavioral Biases
Your brain can be quite tricky with some 95% of its activity occurring subconsciously.[1] With every spontaneous signal, our cerebral synapses expose us to countless behavioral biases, duping us into making misguided money moves long before our rational resolve kicks in.
These biases can affect our investing behaviors and decisions. We may leap before we look, making choices based on emotions rather than rational planning.
Because many of our most powerful biases are based on reflexive rather than reflective thinking, it’s not enough just to be aware of them. We must also learn how to defend against them. Or better yet, turn behavioral biases to our advantage. How do you do that? By tricking your brain right back.
Biasing Toward Better Behaviors
To illustrate this principle, here’s one “trick” that has worked incredibly well for retirement plan participants.
When companies started offering 401(k) retirement saving plans in the 1980s, employees were traditionally invited to participate but were not automatically enrolled. In other words, you had to take deliberate action to get started and increase your contributions over time.
Today, you can still decide if and how much you’ll contribute to your company retirement plan. But instead of requiring you to opt into participating, many companies now auto-enroll you unless you deliberately opt out. Your employer also may automatically increase your contribution rate to the maximum allowable amount over time, unless you say no. By requiring action to avoid saving for retirement, you can trick yourself into saving more than if you had to take action to start saving. Thus, we recruit our tendency to favor inertia, using it to improve on, rather than detract from retirement plan participation.[2]