Heuristics

We all know that Mary Poppins is practically perfect in every way. For her, it’s probably NBD to make rational decisions based on complete and unbiased data that has been thoroughly vetted and analyzed. She’s practically perfect, after all...so why wouldn’t she have a practically perfect decision-making process?

The rest of us, though, don't make such perfect decisions all the time. We tend to use heuristics to guide us: a problem-solving method that sifts through the sometimes-overwhelming amount of data in front of us and uses all sorts of random stuff in our brain to help us quickly categorize it and decide what to do about it. The decisions we make can be based on our emotional state, the memories we associate with whatever we’re doing, or even the outcomes of similar situations we’ve faced in the past.

In the financial world, as in other areas of our life, our heuristics can lead to biases that might then lead to us making questionable decisions. For example, if we tend to always buy stock in Bob’s Tech Company because they’ve performed well for us in the past, then we’re going to be in for a world of hurt if Bob’s Tech Company ever goes under. Or if we don’t buy bonds because our smelly uncle Dwayne was always carrying on about how “responsible investors buy bonds” when we were kids, we might be letting an emotional association stand in the way of a good investment opportunity.

It’s not just our own biases we need to be on the lookout for, either. Everyone uses a heuristic approach—us, our parents, financial analysts, probably even Mary Poppins now and again—but if those decisions affect or influence us in some way, we just need to make sure we’re paying that extra little bit of attention so we can spot any potential mistakes in the reasoning.