Beware your blind spots

Investors, like rugby coaches, may need to change tactics to win the game

Ifind kids fascinating. Not only because they embody the future possibilities and have a seemingly endless supply of energy and curiosity, but also because they are often a less inhibited version of our adult selves. It’s part of why I love going to Saturday sport with my boys. It was here, standing on the sidelines at rugby, that I noticed coaches seem to take different approaches to drive the kids to win. The four types I observed are:

The preserver. Plays the numbers, and values defence over attack; often seen as a very conservative approach.

The aggregator. Cautiously pools the views of his assistants (and more outspoken parents) to hedge his plays based on the collective genius.

The lone ranger. Doubles down on a single strategy where people play specific roles, and relies on building up and empowering individual key players to deliver on that plan week-in and week-out.

The dominator. Studies the opposition’s weaknesses and directs the team to relentlessly hammer the weaknesses.

Which type is more successful? Well, the answer is all of them. The most successful coaches could change their tactical approach based on who they were playing.

When it comes to the wealth game, you are the coach and your investments are the players. The question is whether you’re more naturally a preserver, an aggregator, a lone ranger or a dominator. And can you change your style when the market and competition changes? As I found in rugby, each style has its susceptibilities to cognitive bias that create blind spots and vulnerabilities that leave us open to attack.

Let’s quickly explore each of these investor types, and what you can do about mitigating the weaknesses.

Preservers place a great deal of emphasis on financial security, rather than taking risks to grow wealth. They are more susceptible to loss aversion (the pain of loss far exceeds the pleasure of a gain), information bias (the amount of information trumps the quality) and the status quo (you rely on the things that have worked in the past to bring success in the future).

Things to do to mitigate against the preserver’s blind spots include:

Ask what a trusted friend or respected adviser would do.

Set time limits for making a decision. Make a list of things you have after any loss before deciding the next steps.

Aggregators are cautious and rely heavily on friends and colleagues for advice, and they’re likely to follow the current investment fad. Aggregators’ biases tend to be going along with the herd, recency (recent successes and learnings hold greater weight) and framing (how a proposition is framed impacts trust in what is presented). Things to do to mitigate against the aggregator’s blind spots include:

Complete a risk/reward chart for new investments.

Limit your exposure to articles or people sharing new “hot” ideas.

Keep a diversified portfolio.

Lone rangers are susceptible to confirmation bias (giving more weight to information that confirms their views), short-termism (higher value placed on things in the near future, irrespective of their actual financial value) and self-attribution (good things are because of them, bad things are because of the environment).

Things to do to mitigate against the preserver’s blind spots include:

Learn to listen to a trusted friend when they disagree with your idea.

Make growth the goal, rather than a specific target or date.

Set up rules that limit the percentage of your finances you will invest on any particular idea.

Dominators hold no doubt that they have the ability to accumulate wealth. Dominator biases tend to be over-confidence (placing too much confidence in the “correctness” of a previous decision), illusion of control (over extension of the things that they actually have influence over) and affinity (gravitating towards and liking people who are more like you). Things to do to mitigate against the dominator’s blind spots include:

Intentionally gather people around you who think differently.

Practise emotional regulation activity, particularly to mitigate frustration and reactive decision-making.

Set up some rules as to when and how to exit investments.

The ability to change your strategic mindset in relation to the market and context is key. The first step is recognising your style, your blind spots, and that there are other investing styles that you may need to embody to win. And as every parent on the Saturday sideline knows, there’s no better feeling in life than watching your kids win.

Phil Slade is a behavioural economist and psychologist, and co-founder of decision architecture firm Decida.