Ryan Heidenreich appointed to head Sunpointe Investments’ Kansas City office

Understanding Investment Biases: 2024 Cerulli Study Highlights

The respected Boston-based research firm, Cerulli, recently shed light on two cognitive biases that often sway investment decisions: availability bias and confirmation bias.

Their latest study in behavioral finance reveals that 88% of affluent investors are influenced by availability bias, with confirmation bias affecting 78%. These biases are not only common but also interrelated, and they significantly impact investment choices.  I have highlighted these two biases prominently in my books.

Defining the Biases:  

  • Availability Bias: This bias leads people to overestimate the likelihood of events that are more memorable or easier to recall. For instance, when searching for the “best” mutual funds, many investors might simply Google it and choose from heavily advertised funds. However, some top-performing funds may not advertise as much and could therefore be overlooked due to this bias.
  • Confirmation Bias: This bias occurs when individuals give more weight to information that supports their existing beliefs, while disregarding evidence that contradicts them. It can lead investors to only seek out confirming information about an investment, potentially missing out on critical warning signs, like the potential decline of a stock.

The Independent Investor Type

For those who may know my work, you may recognize these two biases as being characteristic of the Independent behavioral investor type. Independents are characterized by their self-reliance and medium to high risk tolerance, but often fall prey to these two biases. While their independent nature can lead to successful investment decisions, it’s crucial for them to be aware of these biases to avoid one-sided thinking.

Key Recommendations:

  • Embrace education to understand the importance of portfolio diversification and adhering to a long-term financial plan.
  • Cultivate self-awareness regarding availability and confirmation biases to enhance decision-making and investment success.

Don’t let biases dictate your financial future. Embrace a well-informed, balanced approach to investing. Start by reviewing your portfolio today, and if you’re unsure where to begin, seek out a financial advisor who can guide you on your path to investment success.  Remember, the key to smart investing is not just about following the crowd, but about understanding the market and making decisions that align with your goals.