In this episode of the podcast I’m going to be talking about how to overcome the fear of investing. Fear seems like a big word to use, but for so many of us this is the reality, stemming from a fear of making the right decisions and making mistakes.
In this episode we’ll be talking to Neil Bage, a behavioural finance expert. Behavioural finance is really about understanding what drives our emotions and how we make our decisions, so I really found our session so interesting and intriguing.
Neil and I talk about;
- Some of the differences between how men and women behave with money
- Behavioural biases
- The concept of anchoring
- The importance of investing vs saving
- Financial freedom and concept of loss aversion
- Understanding how we can avoid emotional decisions which can lead to financial losses
Neil is a multi-award winning Fintech founder, and founder of a company called Be-IQ Ltd, and Neils’ expertise is focusing on the subconscious, and bridging that complex theory with the real world.
If you are keen to overcome the fear of investing and get started on your very own investing journey, I have decided to offer a 25% discount on my investing course for beginners which will help you to go away feeling completely educated before you start. You also gain access to our private investing community with the course, which a judgement free place to ask all those burning questions you have! Simply enter the code PODCAST25 at the checkout.
Listen to the interview
Hi Neil, can you tell us a little about yourself?
I left school wanting to be a PE teacher, and through studying for that I discovered a love for human biology and sports psychology. It was the psychology element of my studies that really got me hooked on the power of the brain and how dominant it is in everything that we do. I continued to study psychology, and I read a lot and took a lot of online courses.
And then a few years ago I fell into the field of decision theory and linking that with psychology. At the time, I was working for a financial services company so naturally I started thinking about the way that e make decisions about money, and the way that behavioural psychology affects our financial decision making.
So how do we make decisions?
Badly usually! There’s two reasons for this;
- As humans we aren’t evolutionarily designed to make hard decisions. The reason for that is that these big, hard decisions use lots of brain power and the more brain power we use the more physically tired we feel. We are instinctively designed not to run ourselves to physical empty.
- We make decisions heuristically, so based on cognitive biases. When we’re faced with a decision to make, for example tea or coffee, we make a snap decision based on what we already know and previous experience. If we were to make the perfect decision every single time, it would involve slowing down, taking time, weighing up all of the options and pros and cons. All of this takes too much physical energy, so instead we make these snap decisions which aren’t always the optimal ones to make.
This is something I see with a lot of my clients, and of course with my own early experiences of money.
When it comes to really important decisions, our tendency is just not slow down enough. In his book ‘Thinking, Fast and Slow’, Daniel Kahneman basically says that we make decisions in two different ways; fast and slow. The quick decisions are the tea or coffee ones, and the slow ones should be ‘what am I doing about my financial future?’. Daniel’s view is that we need to slow down to make those decisions, but we don’t. Unless we slow down and make really informed decisions, then you’re basically making your financial plans on a whim.
There’s so much jargon in the industry that it makes it even harder for people to focus on understanding and making those informed decisions.
Exactly. That’s why we see so much procrastination around financial decision making. Difficult language, complex terminology, and a need for the use of extra brain power don’t make for a pleasant experience, or one in which we want to engage.
Are there any differences behaviourally between men and women with this?
Of course! Men generally take more risks than women, but there are also several myths such as;
- FALSE – There’s a general view that when under financial pressure, women become more emotional. There’s actually empirical evidence that shows that when women are under financial stress they tend to slow down, taking a broader view of all the facts and figures in order to make a choice. Whereas men have a biological bias to be what’s called more ‘laser’ focused.
I always advise that when making big financial decisions, people should try to have both male and female contributions to the decision making process. Simply because the combination of the two contrasting approaches should lead to a more optimal result.
What do you think are some of the biggest behavioural biases that stop women from investing.
Confidence is definitely one, and is something that has been researched quite extensively. Fidelity, the investment company in the US, conducted research recently with 8 million investors which showed that women overwhelmingly did not believe that their investments would outperform men’s investments. But when the investment results came in, the majority of women’s investments did outperform men’s. So this shows the huge lack of confidence prevalent among women.
How can we know what biases are driving us personally?
First of all, you can do some really quick research on the internet into behavioural biases. Sometimes simply understanding some of the biases that there are can help you to identify them in yourself.
This is a really important question actually; how do you test for your own biases? The answer is that there isn’t really a way to test this in a way that is fun and engaging, and that is really what BeIQ is all about; finding a way to deliver that for anyone. It’s all about self-awareness.
It’s very easy when it comes to money to fall into the traps that retailers place for us. Retailers know how to use and exploit our biases by using things such as anchoring and framing. So anchoring might be, for example, displaying a product with a tag that says “was £300, now £90”. In our minds, we are anchored to the ‘was’ price, so believe that we are getting a huge bargain And they exploit this further by taking advantage of the fact that humans in general struggle with large mathematical sums, and so they use percentages instead.
Framing is another tool that retailers use to exploit our biases, and it might be something as simple as displaying a sign above a dress that says “the most popular dress this summer”. This exploits or desire to be socially accepted and not fall outside of the so-called norm.
I quite often talk to clients about my 48 hour rule when it comes to purchases, what do you think of that?
A commitment device is a great idea. So it’s something that you put into place to allow yourself to behave in a different way. I’m seeing an increase in things like apps that are trying to automate these commitment devices which are great. Anything that allows you to reflect and slow down in your purchasing decisions is great.
What’s called ‘present bias’ is actually a huge thing. We are locked in a perpetual battle between our present selves and our future selves. Our present self wins most of the battles. One of the examples I often use is to ask “If you could have £20 now or £30 in a week, which would you choose?” Most people will answer either way instantly, because one of the options just feels right. Then if I increase the future amount by £10 at a time, eventually the future starts to shout at us in order to win the battle.
Leading on from that, we’ve busted quite a lot of myths in this series around investing, what kind of biases would you say are involved here?
There are lots of different biases that come into this, but herd bias which is more of a social bias, is a big one. Evolutionarily, we have grown into a herd mentality. So it’s very normal to question your decisions when others around you are doing very differently. We believe that there is safety in numbers, so if no one else is investing and everyone you know has all their money in cash, then naturally you are prone to feel safe doing the same thing.
An article that you wrote called ‘Is Financial Education the Silver Bullet?’ really fascinated me. Could you talk about that?
It wasn’t intended to be a controversial article, but it ended up being that way! Basically there’s this idea in the financial services industry that the financial woes of people would be solved by introducing a financial education programme into the national curriculum. But I disagree.
There are many subjects taught in school, with a huge amount of effort and emphasis, that we never actually use or apply in our real lives. I believe that this is the case with financial education. The general population doesn’t deal with financial decisions, on the scale that a finance professional does, on a daily basis. The assumption is that by educating people they will know when and how to apply it, but I don’t believe that having knowledge and your head and actually knowing when and how to use it are the same thing.
I’m not anti-financial education by any means. Crucial financial knowledge is important, but teaching people in depth financial jargon and knowledge feels to me to be a step too far. The Dunning-Kruger effect shows that in order to know how little we know about a subject, we have to be an expert. What this means effectively, is that if people have a little information they actually believe that they are far more skilled and knowledgeable in that area than they are. So if we give people this financial education, we also run the risk of people with limited financial capabilities believing that they are far more financially competent than they are.
I think it makes sense that the industry begins by simplifying itself. We make it very difficult for people to engage with and understand the financial services industry. I also believe it needs to be made more interactive and interesting. The financial services industry is dull and boring, so it becomes something that we have to do rather than something we want to do.
I agree, that’s really my sole aim with what I do, to reduce the jargon around finances and money and bring things to people in a way that they really understand and engage with.
Absolutely. The key thing that you do so well is to talk to people in a way that they understand, and in a form that they understand. People use video conferencing every day, they use text messages and watch videos online. They listen to podcasts. The financial services industry is still sending 15 page letters that people don’t want to engage or interact with. That’s how you start to help people overcome the fear of investing.
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App – Get Chip
Herding/Social compliance video –
Women are better investors – Fidelity
BooksWhy We Sleep: The New Science of Sleep and Dreams – Matthew Walker Thinking, Fast and Slow – Daniel Kahneman