MINT HILL, NC – Have you heard of the word heuristics before? What if I told you 95% of us use heuristics? These are also known as mental shortcuts, such as a rule of thumb (general guidelines say this is the right thing to do), an educated guess (this seems like the right thing to do) or intuitive judgment (it feels right) to make complex decisions. Let’s explore two different behavioral biases that can influence how we process and interpret information, especially when markets are volatile.
Cognitive Biases: This is a type of thinking, often a mental shortcut, that occurs when we’re
processing and interpreting information. An example of this is anchoring. Anchoring is the tendency to continue using information that has been used in past decisions despite the existence and availability of new and relevant data.
Emotional Biases: As the names suggests, emotional biases stem from emotional factors, like
impulse or intuition, which distort cognition and decision making. An example of this would be, loss aversion. Loss aversion is when investors typically feel the pain of loss more profoundly than the joy of an equivalent gain.
What is my advice to you? Discover which one you are and seek guidance to help you manage it.
Let us help you find your clarity of purpose!
This article was written by PIMCO for use by your local Cambridge Investment Research Financial Advisor.
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