Are you a "cultured" investor?
Identifying bias in your investment choices
You may think you’re a disciplined investor, because you only depend on reliable sources of information to guide your investing decisions, diversify your portfolio, and steer clear of rumours and hearsay. But no matter how skeptical you may be about heeding investment advice from that trader friend of yours or all the financial gurus on social media, your background and daily interactions influence your investing decisions more than you think. Today, we’ll look into the influence your cultural and social background have on investment decisions.
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The interactions of a person are usually limited to their family, neighbours, coworkers, and friends; the people around them. Consequently, people usually start investing by following in the footsteps of investors around them, before they start figuring things out for themselves through trial and error.
And while you may learn to rely only on trusted sources of information to make informed investing choices, cultural and social factors continue to influence your investment decisions till long after you become a seasoned investor.
For one, cultural norms and societal attitudes can influence individuals' risk tolerance and willingness to engage in certain types of investments. In cultures where risk-taking is encouraged, individuals may be more inclined to invest in higher-risk, higher-return assets. In contrast, cultures that value long-term planning and patience may encourage investments with a longer time horizon, such as real estate, gold, bonds or FDs.
This covers some of the subtle impacts of culture and society, but there’s more. While you keep an eye on markets, at the same time, you also subconsciously try to gauge the general financial atmosphere to predict how these markets will move. And this atmosphere that you perceive is also highly biased by your surroundings, further cementing the social influences on your investment choices. For instance, if the people around you are all investing in a particular asset market, you will be more inclined to explore that market.
Let’s take an example to demonstrate this.
Imagine you're an individual from a close-knit community in UP where real estate investment has been a traditional and culturally accepted way of accumulating wealth. In this scenario:
Cultural Influence:
There might be a cultural norm that places a high value on property ownership. This cultural inclination towards real estate could influence your investment decisions, making you more inclined to invest in residential or commercial properties rather than, say, the stock market.
Social Network Influence:
Your family, friends, and neighbors may have successfully built wealth through real estate investments. The success stories within your social circle could serve as positive reinforcement, influencing you to follow a similar path. Conversations at social gatherings might revolve around the booming real estate market, further encouraging you to consider property investments.
Local Economic Factors:
The economic landscape and opportunities in UP may also play a role. If there's a visible trend of economic development and urbanization in the state, you might be more optimistic about the potential returns on real estate investments.
Perceived Financial Atmosphere:
If the general sentiment in your community is optimistic about the real estate market in UP, you might perceive the financial atmosphere as favorable for property investments. This collective perception can significantly impact your own outlook and decisions.
Market Bias:
Due to the influence of your surroundings, you might find yourself more inclined to explore real estate markets within UP, even if there are other potentially lucrative investment opportunities in different sectors or regions.
While this example focuses on real estate in UP, the principles apply to various investment avenues. The point is that cultural and social factors create an environment that shapes perceptions, preferences, and ultimately, investment decisions.
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So, should you actively change your investing behaviour?
While you may think that ideally, your investing should be absolutely objective, free from any bias, it’s not always practical, or even necessarily better to actively find and avoid these inherent cultural and social biases. While it is indeed prudent to avoid letting your surroundings overly influence your reading of consumer confidence and other factors at a broad scale, continuing to invest in similar assets (not necessarily the same, mind you) may actually be beneficial to you.
It allows you to leverage your expertise in particular markets that you have built with time. And more importantly, since your immediate environment has encouraged investing in these markets, you are likely to have more and reliable sources of information or peers to learn from, geared toward these markets.
All things considered, being aware of some of these inherent biases can help you overcome them and expand your investment horizons to markets and assets that align better with your investment philosophy. Staying informed is definitely important, but don’t forget that it’s how you perceive and analyze the available information that ultimately guides your decisions. And it never hurts to be more aware of your own biases.
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In today’s edition, we’ve shown you how social and cultural influences can significantly shape your decisions and even your journey as an investor, for long after they stop being visible. At Stable Money, we’re going to keep you informed and ensure that you make the best investment decisions.
Best, Team Stable Money