This instinct remains present in everyday decision-making. The fear of something going wrong outweighs the buzz of positive and constructive returns.

The physical and emotional paralysing effect stifles innovation and exploration. Negativity bias can halt personal development and prevent you from achieving Purposeful Prosperity.

Five questions to banish fear and negativity bias

Warren Berger, a journalist who has made a study of the power of questions and their influence, suggests five questions to consider when making difficult decisions involving negativity bias and the fear of something going wrong:

1. What would I try if I knew I could not fail? (This question is designed to remove the constraint of failure.)
2. What is the worst that could happen? (Clients fear calculating their expenditures, for instance, but usually, it’s not so bad.)
3. What could cause me to fail? (This powerful question forces you to research and plan for short and long-term uncertainty.)
4. How would I recover if my choice led to failure? (Recovery might be easier than you think, so have a Plan B.)
5. What would my life look like if I did decide to do this? (Think about your potential successes and light your torch.)

Negativity bias in financial decisions

In 1991, the Bank of Credit & Commerce International (BCCI) went bust because it could not meet its obligation to pay extraordinarily high cash savings rates. Thousands of scared and angry savers, presumably impervious to negativity bias, eventually received only a few pence in the pound.

Conversely, negativity bias can influence investors to keep significant cash holdings, preventing them from gaining long-term total returns from equities.

Financial decisions must involve an assessment of the risks and returns involved. A good evaluation will increase the probability of achieving your goals, refine your expectations of returns and volatility and put negativity bias in its place.

Consider three types of risk when you make financial decisions:

1. The risks you are prepared to take. A qualitative assessment of how you feel about loss, expectations of returns and your understanding and experience of financial investment.
2. The risks you need to take. A quantitative assessment of how much or how little risk you need to take to achieve your life goals and spending plans. A lifetime cash flow projection can help you calculate this.
3. Your capacity for loss. A quantitative assessment of how much you could lose without endangering your goals and security.  Once again, a lifetime cash flow projection will help you calculate this.

Have a risky conversation.

Use the following questions to help you have a conversation (with yourself, your partner or your family) about your attitude to financial risks and returns.

• Do you consider yourself to be financially savvy and experienced?
• Is your concern more with the losses or gains? Is negativity bias prominent in your assessments?
• Recall some of your past investment decisions. Do you consider yourself to be a low, moderate or high-risk taker? Has this changed over time?
• Do you think of risk in terms of ‘falls’ or ‘losses’? What level of fall or loss in your portfolio would stop you from sleeping at night? 10%, 20%, 50%
• Which do you consider the more significant risk: short-term stock market falls or long-term loss of purchasing power due to inflation?

It is essential to consider risks and returns, especially when making financial decisions. After all, would you have put your savings into BCCI if you had considered the risks and returns involved?

Your Next Steps

Reflection time

Think about a recent investment decision.

• Did you consider the three types of risk above (risks you are prepared to take, risks you need to take, and your capacity for loss)

Think about a recent life decision.

• Were you inclined not to go ahead because you were afraid something would go wrong

Think about a time in your life when you made a decision that led to a positive result.

• Were you scared then, possibly even thinking about putting your decision on hold?
• When did you light your torch and realise that the potential for growth and success outweighed your negativity bias?

Join the conversation

Share your thoughts, comments, and reflections in the comments section below and forward the post to a friend.

Taking it further

Attributions and references

Photo attribution

Photo by Toa Heftiba on Unsplash

Audio link

https://audio.com/jeremy_deedes/audio/negativity-bias/

Other attributions and references

Berger, Warren. The Book of Beautiful Questions: The Powerful Questions That Will Help You Decide, Create, Connect, and Lead. New York, Bloomsbury Publishing USA, 2018.

Related posts

Escaping Left Brain Dominance: A Balanced Approach to Money

Strengthening Your Portfolio: Beyond Global Equities

https://wordsnotdeeds.co.uk/portfolio-construction/

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Your views are important, and your fellow readers would love to hear your opinion, so share your thoughts in the comments box below, and thank you for your time and generosity.