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Behavioral Advisor Perspective and Practices: Bear Market Behavioral Biases - Are You Sure About That?

We make 95% of our decisions using Systems 1 Thinking that is automatic and emotional using mental shortcuts. Systems 2 Thinking, by contrast, requires conscious effort with logical thinking and analytical methods. Long-term investing is often counterintuitive and requires a disciplined System 2 approach. Bear markets compound our normal biases generating strong emotional triggers that can result in poor decision making.


Awareness of these biases and behavioral coaching can help advisors and clients to avoid making behavioral mistakes in the moment. Some of the more common and costly bear market biases are listed below:

  • Hindsight Bias - We all know the Monday morning quarterback who knows exactly what play to call and is sure it would have succeeded. The same is true with bear markets, everyone believes we should have seen it coming and they would have done something different. Of course, very few people saw it coming and even fewer had the systems and courage to act upon it. Who can really get it perfectly right on both the down and up sides of a bear market?
  • Recency and Availability Bias - With daily headlines and dramatic storylines of disasters and heroes, in the current environment it feels like this moment is all there is and our fate hangs in the balance of every decision. Our minds race with each new bit of information cascading and projecting potential extreme outcomes. To put things in perspective, Bear Markets happen about 1% of the time, roughly once every 6 years and long-term stock returns average around 10% per year, including all the bear markets and recessions!  
  • Loss Aversion, Anchoring and Regret - By nature, we feel twice as bad about a loss as we do an equivalent gain and are hardwired to over-react to any perceived loss. Of course, we also become anchored on peak values prior to the downturn along with how much we lost and when we will get it back. We conjure up regret and torture ourselves with should have, could have and would have scenarios.
  • Overconfidence Bias - Given the disaster that has occurred, we promptly “take control” and fire our experienced investment advisors and managers. At this point, we can easily confuse luck with skill and we substitute things that happened to work out during this short period of time with things that work consistency over time. Our emails will soon be full with magic elixirs that can prevent or cure all our bear market ailments.
  • Fooled by Randomness and Confirmation Bias - We see information and patterns and believe we have some profound insight. We are particularly subject to information that confirms our own existing ideas. Most of what lies ahead is uncertain and random, an uncomfortable reality.  

Making emotionally driven decisions in the heat of these elevated times can often result in costly mistakes. A better approach is to slow down the process along with careful and systematic evaluation. In many cases if we are honest, the results will be vague and uncertain. Often the best course of action is to wait and see how things unfold. From a behavioral perspective we can reframe, reset and restart.

  • Reframing in large part can be helped by taking a longer-term perspective and by viewing information in terms of data and probabilities.
  • Resetting revolves largely around letting go of recent and past events, this can be aided by taking stock of current realities to form a new starting point or baseline.
  • Restarting can be accomplished by focusing on moving forward and formulating a practical plan of action. Reviewing and revising financial plans can be a valuable tool in this process.

We can also take a cue from successful organizations that know, for survival and success, they must accept the new realities, develop new plans and forge ahead. Putting current events in a longer term context and focusing on what you can control with practical planning can help to relieve stress and avoid costly mistakes. Below are Behavioral Advisor coaching resources that can be used to help clients become more aware of potential biases and how to mitigate them as we all navigate these difficult times.

 Long-Term Perspective



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The information provided here is for general informational purposes only and should not be considered an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. It should not be assumed that recommendations of AthenaInvest made herein or in the future will be profitable or will equal the past performance records of any AthenaInvest investment strategy or product. There can be no assurance that future recommendations will achieve comparable results. The author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions. AthenaInvest disclaims any responsibility to update such views. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of AthenaInvest.

You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives and financial circumstances. You should consult with a qualified financial adviser, legal or tax professional regarding your specific situation. Investments involve risk and unless otherwise stated, are not guaranteed. Past Performance is no guarantee of future results.



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