R.P. Seawright of Above the Market recently released his list of “Investors’ 10 Most Common Behavioral Biases,” a valuable juxtaposition of most common investing mistakes with the behaviors and attitudes behind those same mistakes. This article is a series of expansions and explorations of each bias.
Investor Behavioral Bias #5: The Planning Fallacy
On a scale of one to ten, how confident are in you in your ability to plan your financial future? It may be better to ask yourself, “How well do I accurately plan my future?” Whether it’s as simple as knowing how many miles we can drive on a empty tank or the more complex dilemma of choosing investment options, many of us underestimate potential risks in our future. The Planning Fallacy is our inability to accurately estimate our future time, costs, or risks for financial investments.
Roger Buehler, Dale Griffin, and Michael Ross published an exemplary article through MIT on historical examples of Planning Fallacy. The Sydney Opera House is the crowning example of disastrous estimate planning with a completion date over ten years past its original projection. The finished Sydney Opera House is a scaled-down version of the primary plans with a final cost price ballooning from $7 million to over $102 million! (Great Planning Disasters - Peter Hall, 1980)
The two contributors to the Planning Fallacy is over-confidence in our abilities while underestimating the risks, costs, and time involved. In the world of financial investments, many investors believe that high risk, low reward investments will have little to no effect on wealth management practices because of our false sense of optimism.
A third-party trusted financial advisor can provide realistic insight into future financial planning. Relying on their perspective can help investors avoid costly risks while following balanced and unbiased financial advice.