Master the Mindset: Our Hidden Bias Damaging Success

by Jeffery A. Keill CFP, CIM, FMA, FCSI, CEA

Successful investing isn’t about intelligence; it’s about wisdom. It is not about  getting the right stock tip: it’s about getting the right investment advice. It’s not about picking the right stock but rather adhering to the right mindset. As many of our clients have heard me say- we are in the Relationship Business as much as we are in the Money Business. I want to talk about one of the most pervasive psychological traps investors fall into: Myopic Loss Aversion. This behavioural bias can quietly erode your returns and is a reason why investor return is almost always lower than investment return.

What is Myopic Loss Aversion?

Myopic Loss Aversion combines two psychological tendencies:

• Loss Aversion- The pain of losing money feels more intense than the pleasure of gaining the same amount. This is a human bias that is deeply entrenched in us.

• Myopia (shorth-sightedness)- This is the tendency we have in focusing on short-term outcomes rather than long-term trends; even in the face of overwhelming evidence.

When these two powerful forces collide, investors tend to overreact to short-term market fluctuations. A small dip in portfolio value can feel like a big emotional hit, prompting premature selling or overly conservative decisions - even when long-term outlook remains strong, or has even improved.

How it Affects Investing

Back in 1995, Shlomo Benartzi and Richard Thaler wrote a paper in the Quarterly Journal of Economics about Myopic Loss. Their observation was that investors who require frequent feedback on their investments from various statements, watching the news, checking periodicals (there was no Google search in 1995!) were more likely to make conservative choices which lowered their returns regardless of the long-term evidence to support the opposite behaviour.

How to Know You are Experiencing Myopic Loss Aversion

• You are compelled to check your investments frequently during periods of unrest.

• Although the money will serve you for a longer period of time, which is why you initially invested, you feel compelled to become more conservative.

• You are emotionally charged with recent news that may or may not affect your investments.

• You believe this time is different and the evidence to the contrary is irrelevant now.

• You can rationalize emotional conclusions without evidence.

How to Beat the Bias

Here are practical ways to counter Myopic Loss Aversion:

• Check your portfolio less often - Quarterly or Semi-Annual Reviews can help you stay focused on long-term goals. Daily or weekly reviews are dangerous.

• Write yourself a Declaration of Investment: Consider writing one paragraph summary of why you invested in the portfolio you chose. Highlight how it matches your goals.

• Only God Need Not Diversify- Maintaining a properly diversified portfolio reduces volatility and the emotional rollercoaster.

• Automatic Wealth- Systematic investing (like dollar-cost averaging) removes emotion from the equation, simplifies the experience and reduces the timing risk.

Final Thoughts

Myopic Loss Aversion is a subtle but extremely powerful negative force in investing. It’s not what is going on in the world, the economy, or the markets that determines your returns - it’s your response to it. By understanding this bias, having a conversation with our Wealth Advisory and putting systems in place to minimize its effects, you’ll be better equipped to stay the course and grow your wealth overtime.