Biases are inherent in all of us, and virtually in everything we do. At Waller Financial, we have scrutinized our investment process to eliminate biases whenever possible. I do not believe all biases can be eliminated all the time; however, our process aims to identify them, so we can acknowledge the biases and proceed appropriately. We strive to build our opinion on the merits of an investment, not our biases.
We start by having a clearly defined investment philosophy: Preserve and increase the real wealth of clients through a disciplined process that focuses on goals, risk aversions and cash flow needs. One of the most important aspects of our investment philosophy is that it is a disciplined process.
One of the most common biases we try to eliminate is anchoring. Since we have used many of our money managers for years, we can easily anchor our current opinion based on our historical assessment of our money managers. In order to combat this, we remove the manager’s name when reviewing investment results. This allows the raw numbers to speak, and not an ingrained opinion.
Another common bias in the investment world is framing, which is defined as being influenced by how something is presented to you. It is very common for companies to interview money managers during their due diligence process. We do this as well; however, we place the interview last, whereas most firms do it early in the process. We do this to form an opinion of the merits of an investment before talking with the money managers. Our objective is to eliminate the money manager from influencing our process.
Confirmation bias is another common bias we strive to eliminate in our investment process. Confirmation bias is when you consciously or subconsciously seek out information to confirm your initial assessment while ignoring a contrasting view. To combat this, we draft a contrarian opinion on every decision we make. Before proceeding with an investment, we ensure the contrarian viewpoint has been properly assessed.
Hindsight bias is unique and challenging because it can affect us in a number of different ways. It is rather easy for our brain to remember things differently than how they actually happened. This bias can occur when decisions turn out good or bad. The important aspect of removing hindsight bias is to focus on the process, not the outcome. You can have a great process that results in an undesirable outcome, just as you could have a bad process that resulted in a good outcome. Over time, however, a good process will be rewarded.
Loss aversion is another bias, but we embrace it rather than eliminate it. Like you, we strongly prefer to avoid losses more than making gains. In our process, we focus on reviewing investment results on a risk-adjusted basis than just a gross return. Additionally, when reviewing investment performance, we favor investments that are more consistent versus volatile.
Having a disciplined process that reduces or eliminates biases is essential for achieving long-term investment results.
*Check out our other article on biases to learn more.