Behavioural finance rests on a simple premise: The biggest risks in investing are embedded in ourselves as decision makers. Biology encourages our brains to take cognitive shortcuts that can cause big problems.

Psychologist and author Daniel Crosby explains that we do not have to be our own worst enemies when it comes to investing and it is possible to navigate around our innate shortcomings and counteract our biases.

Human nature is both a miracle and a mess. Things that have given rise to our success as a species – from a reproductive standpoint, from an evolutionary standpoint – often serve us poorly as investors. Risk aversion, for example, has helped us adapt and survive for thousands of years, but it also leads us to make bad financial choices. But the first step to overcoming these errors and making better decisions is identifying those biases that influence our judgement.

Daniel Crosby categorizes all the behaviour tendencies into four primary types of behavioural errors.

• Ego: Ego-driven biases manifest as overconfidence, or the belief that we will consistently perform better than average. We believe our insights are more accurate and measurements more precise than those of others. Over-precision is one way that we get it wrong. We seek out information that confirms an investment thesis and ignore disconfirmatory information (Confirmation Bias) The tendency to perceive a stock or a fund as valuable simply because we own it (Endowment Effect).
• Conservation: These types of biases occur when we stick with what we know, conflating the familiar choice with the best choice. Take the Mona Lisa – one of the most famous paintings in the world. Do we value the Leonardo da Vinci work based on its artistic merit? Probably not. We confuse having heard of something being good, all the time. Human preference for things to remain as they are (Status Quo Bias). The belief that all that has been is all that will ever be (Normalcy Bias).
• Attention: These biases allow our memories to influence our assessment of probabilities. As an example, Crosby discussed how memories of 11 September 2001, terror attacks made many wary of plane travel. This meant more people opted for car travel long-distance travel, which in turn led to an increase in traffic fatalities. We do this all the time, in big ways and small. We confuse the ease of recalling information with its impact or probability (Availability Bias).
• Emotion: We confuse our emotions with our risk management. We confuse what’s fun and what makes us emotionally feel good with what’s safe. Emotional behaviour has driven booms, busts, and bankruptcies throughout market history. The belief that we are less likely to experience a negative event than others (Optimism Bias). Attempting to avoid risk by pretending it does not exist (Ostrich Effect).

But recognizing these biases is only the beginning. The next and most critical step is counteracting them and taking steps to drain the emotion out of investment decisions.

Check data carefully. Find ways to develop an outsider’s perspective on subjects with which we aren’t familiar. Welcome contradictory views. I read somewhere that a global asset manager had a shadow committee to provide counter arguments to the investment committee that puts together their best thoughts and ideas.

Crosby singled out meditation, in particular, as being especially useful for investment professionals looking to reduce emotional attachment.

These biases also explain why the guidance of a financial adviser is so important. Most investors could do with the help of professionals to counter their own intuitions and emotions.