Your Portfolio Could See Losses If Endorsements Guide Your Investments

Your Portfolio Could See Losses If Endorsements Guide Your Investments

 

We are all susceptible to influence from people we admire or look up to.

While this may be a good trait in imbibing some traits or practices; following influencers and their endorsements can be harmful to your investments.

 

In personal finance, the Influence-from-Mere-Association Tendency plays a key role in shaping our financial decisions, often without our conscious awareness.

 

This cognitive bias leads us to form opinions or make decisions based on associations, rather than on objective analysis or factual evidence.

 

In investing, this tendency can manifest in various ways, from the brands we trust with our investments to the financial advice we choose to follow, often influenced by the mere association with success, prestige, fame or familiarity.

 

The Role of Association in Financial Decisions

 

The Influence-from-Mere-Association Tendency can significantly impact our spending habits and investment choices.

 

For instance, individuals might prefer certain investment funds or stocks simply because they are associated with well-known, successful companies, regardless of the underlying financials or market conditions.

 

Similarly, the endorsement of financial products by celebrities or influential figures can sway our decisions, leveraging the power of association over rational judgment.

 

Managing Association Bias

 

Recognising and mitigating the effects of this bias in personal finance requires a conscious effort to separate mere associations from substantive, evidence-based financial planning.

 

Here are some steps to manage this tendency:

1.   Critical Evaluation: Before making a financial decision, critically evaluate the reasons behind your choice. Ask yourself whether the decision is based on solid financial principles and data or merely on the association with success, prestige, or familiarity.

2.   Research and Due Diligence: Conduct thorough research and due diligence on financial products, services, and advice, regardless of their source or associated brand prestige. Look beyond the surface and assess the fundamental value and potential risks involved.

3.   Seek Independent Advice: Consulting with an independent financial advisor can provide an objective perspective, helping to counteract the bias introduced by mere association. Independent advice can help identify the best financial strategies and products based on your unique circumstances and goals, rather than on popular associations.

 

Brand Loyalty in Financial Behaviour

 

Brand loyalty, a specific form of the Influence-from-Mere-Association Tendency, can also affect financial behaviour.

 

While loyalty to a particular financial institution or product can be based on positive past experiences, it's important to remain open to alternatives that may offer better returns, lower fees, or more suitable features for your financial situation.

 

Overcoming Association Influence

 

To overcome the influence of mere association in personal finance, it's crucial to foster a mindset of scepticism and curiosity.

 

Questioning why we feel drawn to certain financial decisions and whether those feelings are justified by facts can help us make more informed choices.

 

Additionally, diversifying sources of financial information and advice can expose us to a wider range of perspectives, reducing the risk of making decisions based solely on association.

 

Making Informed Financial Decisions

 

The Influence-from-Mere-Association Tendency is a powerful force that can subtly sway our financial decisions, often leading us away from the most rational or beneficial choices.

 

By recognising this tendency and adopting strategies to mitigate its effects, we can make more informed, objective financial decisions.

 

This involves critically evaluating our motivations, conducting thorough research, seeking independent advice, and maintaining a healthy scepticism towards associations.

 

Ultimately, the goal is to base our financial decisions on solid evidence and principles, rather than on the mere association with success, prestige, or familiarity, paving the way for financial stability and growth.