The news from the Office of National Statistics (ONS) that inflation has eased slightly from its 41 year high at 11.1% to 10.7%, will provide a little hope but not quite enough to eradicate the worry that people feel for the immediate future and their financial position.

For those already struggling to cope with the rising cost of living, this will only compound the situation. For people fortunate enough to have investments, some may need to make decisions about how to plan to support the increasing cost of living. For many, a better understanding of cognitive and emotional biases could help.

Unfortunately, as humans, we have limitations on our abilities to process all the necessary information when making a decision in order to make the most rational choice, particularly as we are often bombarded with a wealth of information and have time constraints in which to make decisions. So, when it becomes challenging to keep track of the ever-changing prices of goods, interest rates, and trends in inflation, then we can often make shortcuts in our thinking to simplify the decision-making process, but this can lead us to make errors.

Dynamic Planner outlines below well-known biases that are particularly fuelled by the news of high inflation, along with ways to reduce or avoid them:

  1. Framing effect– this refers to how information is presented. People rely too much on the way a message is framed which can affect how they interpret information and therefore act on it.
    How to avoid: Try to reframe a problem or message and find alternative perspectives. Research also shows that those who are more knowledgeable and up-to-date on an issue are less susceptible to the framing bias and the way a message is portrayed. It is therefore important to discuss inflation and its impact with an expert or read the financial sections in newspapers and online to help understanding.
  2. Anchoring bias– During uncertain times decisions can be influenced by fixating on a reference point or information you have received. People may make comparisons, estimates and decisions in relation to this reference, which is known as anchoring, ignoring other relevant information.
    How to avoid: Research shows that just the way in which information is presented can cause people to look at a reference point and ignore all other relevant information. Even though a reference point, whether one you have determined or have observed in the media, may seem important, don’t be fixated on a figure, they are often arbitrary and irrelevant, and can cause greater worry.
  3. Regret aversion– Anticipating regret and envisioning the emotional discomfort of making a poor decision can result in inertia, where people may fail to act or stick with a default option for fear of making an active choice which later turns out to be sub-optimal.
    How to avoid: Not making or avoiding a decision still involves making a choice. Research found that automatic pension enrolment increased pension participant rates from 49% to 86% in 2001, and this is why such behavioural nudges (an opt-out rather than an opt-in system) have been applied today, helping us to save more for the future. Spend time thinking about your priorities and viewing the future with optimism, finding ways to better regulate your emotions can also help reduce fear and succumbing to feelings of regret when facing a difficult decision.
  4. Present bias– Individuals can have the tendency to pursue instant gratification by overvaluing present rewards at the expense of future returns. We often engage in impulsive behaviour in return for immediate pleasure, whether opting for unhealthy fast food or spending money today rather than saving for tomorrow.
    How to avoid: It is important to delay gratification particularly when we consider saving for retirement, immediate rewards can often lead to regret. When saving, set realistic goals as setting yourself up for failure can reinforce the desire to accept instant rewards and discourage you from persevering and saving for the future.
  5. Availability bias – refers to our tendency to use readily available information, information that comes to mind quickly and easily when making decisions. We also often evaluate the likelihood of future events on recent memories without putting them in perspective of the longer-term past which can lead us to make poor financial choices.
    How to avoid: Perceptions of inflation can be heavily influenced by your personal purchasing experiences. Research shows that price changes of items that were recently purchased, bought frequently, resulted in an increase in price, and particularly a large increase, influenced people’s perceptions of inflation. Gain a more accurate and objective picture of inflation and discuss with an expert or research the current situation, as recent events and personal experiences can cloud your judgement and lead to greater worries.

Louis Williams, Dynamic Planner’s Head of Psychology & Behavioural Insights said: “The current situation is worrying for everyone, some of us will not have experienced inflation anywhere near as high in our lifetime.

“For those who are fortunate to still have a degree of choice in how to manage their money, understanding the biases that may influence their attitudes and behaviour could help them achieve better longer-term outcomes as well as counter some of the impact of inflation.

“Having a much deeper understanding of our susceptibilities to behavioural biases can be a great help in overcoming rash or ill-thought-out decision making, especially when faced with all the uncertainty we have right now combined with the soaring cost of living.”

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