Be a Better Self-Directed IRA Investor: Be Aware of Cognitive Biases and Emotional Traps
Are you as ‘squared away’ for retirement as you hope you are? Maybe not. The Center for Retirement Security at Boston College has launched a new tool to help taxpayers determine whether they are on track for retirement – and to help Americans identify and address common psychological and behavioral traps that can short-circuit your retirement decision-making. We recommend it for all Self-Directed IRA investors and conventional investors alike.
Curious Behaviors That Can Ruin Your Retirement is an interactive program on behavioral impediments to retirement planning. A host leads users through a series of exercises designed to create an “Aha!” moment as they relate to the behaviors. The host then explains how the behavior can hinder retirement planning and, coaches users through strategies that can help minimize the effects of these subconscious biases and help them develop a more rational decision-making process.
Users can then go to a “Learn More” page, which presents more information in multiple media formats. It is a terrific tool for all ages.
The tool is a fun and lighthearted look at a serious issue: Millions of Americans fall victim to irrational thought processes, emotionalism, wishful thinking, denial and a series of other misconceptions and cognitive weaknesses that cost real money.
A recent research report from Deloitte lists the following behavioral biases that can impact your ability to manage your Self-Directed IRAs:
- Inertia: When you are used to doing things a certain way, the tendency is to take no action.
- Present bias: The tendency to prioritize current wants over long-term needs
- Passive decision making: The tendency to follow the path of least resistance, or to choose from the most obvious, readily-apparent options rather than investigate possible options more deeply.
- Anchoring: The tendency to base decisions on a set value that may be irrelevant.
- Partitioning: A tendency to make commitments piecemeal when you would be better served by bolder action. For example, the tendency to “dollar cost average” into a rising market when you may be better off investing a larger lump sum.
- Peer pressure: Irrationally allowing other equally irrational actors to influence your decision-making.
- Overconfidence: Excessive belief in your own abilities.
- Effort aversion: The tendency to embrace the easy wrong option over the difficult right one.
- Loss aversion: Allowing the fear of possible loss to prevent you from taking reasonable risks in the prospect of greater gains.
- Endowment effect: The tendency to avoid giving up what one already has, even when a clearly better option is available.
As a group, Self-Directed IRA investors tend to be a rational bunch. Many of our clients are veteran investors and business people who have achieved significant success over the years. But all of us are human, and none of us are immune to any of these cognitive biases.
But forewarned is forearmed: Being aware of these biases and emotional traps can help you prevent falling victim to them. And that is going to make you a better Self-Directed IRA investor.
For more information about Self-Directed IRA investing, or to get started on your Self-Directed IRA investing journey, call us today at 866-7500-IRA (472). Or visit us at www.AmericanIRA.com.
We look forward to serving you.