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Individuals feel the pain of losses much more acutely than they experience the pleasure of gains


Kahneman (2002) and Robert Shiller (2013), have shown that most of us don’t act in accordance with supposedly “logical” economic theories, and often behave in ways counter to our interests. “If we are going to have useful theories about how typical


people shop, save for retirement, search for a job or cook dinner, those theories had better not assume that people behave as if they were experts,” writes Thaler in his 2015 book Misbehaving: The Making of Behavioral Economics. “We don’t play chess like a grandmaster, invest like Warren Buffett, or cook like an Iron Chef.”


Rather, people make predictable errors due to universal


biases that influence behaviour, Thaler noted. Moreover, we can seek out methods to “hack” these biases and “nudge” us into making decisions that are more in line with our interests. “There are two main ways to deal with these inherent biases,”


says Decker, a former transfer pricing manager at PwC. “First, through education so we understand that we have these biases, and second by creating behavioural solutions so that we can use these biases to work for us.” Lisa Kramer, a professor of finance at the University of


Toronto’s department of management and a research fellow at Behavioural Economics in Action at Rotman, agrees. “This is how we behave as humans. We need to stop feeling guilty about things we do that are human nature and instead look at the ways we can use our human nature to better our situations.” To that end, here are some of the most common behaviourial


biases that we humans face, along with suggestions as to how you can make them work for, rather than against, you.


Status quo bias (a.k.a. inertia) As the laws of physics tell us, unless acted on by outside forces, an object at rest stays at rest and an object in motion stays in motion. The same can be said of our decision-making process. Humans prefer to maintain their current state, even if making a change would provide a better outcome. Examples are everywhere, from the renewing mortgagee who


stays with his or her current lender instead of searching out better rates; to the gym member who never works out but con- tinues to pay monthly fees instead of cancelling the contract; to the procrastinator who plans to start saving for retirement soon but can’t seem to get started. Understanding this human tendency to remain with the


status quo, Thaler proposed an interesting solution to retire- ment savings procrastination. If employers with defined contri- bution pensions automatically enrolled their employees in the plan and provided a provision to opt out, rather than put the


30 | CPA MAGAZINE | JANUARY 2018


burden on the individual to opt in, inertia would work in the employee’s favour. Thaler was right, as his and subsequent research studies have


shown. A 2015 paper by Vanguard Research, for example, looked at half a million new hires from January 2010 to December 2012, and found that 91% of those under automatic enrolment remained in their employer plan after three years, compared with 42% under voluntary enrolment.


How to make it work for you Even if your employer doesn’t automatically enrol you in its pension plan (or doesn’t offer a pension at all), there are lots of ways you can use inertia in your favour. For one, try not to sign up for open-ended gym or service contracts that involve monthly payments until you cancel; instead, insist on a specific term that requires you to take action when the contract expires. Set up automatic monthly transfers from your chequing account to a tax-free savings account or registered retirement savings plan. Or try out a service such as Mylo, an app that will automati- cally round up every purchase you make and invest the spare change. So, for example, if you spend $3.25 at Starbucks (using a credit or debit card that’s linked to the app), Mylo rounds up your purchase to $4 and sets aside 75¢ in your Mylo account. Every week, it adds all the roundups generated with your pur- chases, withdraws the total from your chequing account and invests it for you in a customized portfolio of low-fee exchange- traded funds (with management expense ratios of 0.05% to 0.37%).


Loss aversion It’s better to have loved and lost, romantics say. But according to behavioural economics, individuals feel the pain of losses much more acutely than they experience the pleasure of gains. Researchers Amos Tversky and Daniel Kahneman proved this bias against loss in 1991 using a coin-toss experiment. They found the average person would only agree to bet on the toss if the potential winnings were about double the potential losses — say, heads you win $20; tails you lose $10. This is why during a market downturn, many investors sell


off funds even though it breaks the first rule of investing: buy low, sell high. The pain of the loss is too much for them to handle. “They see their nest egg start to vanish and they panic with a knee-jerk reaction. Their instincts lead them astray,” says Kramer. Indeed, some argue we’re hardwired to avoid losses at all


costs because it gave us an evolutionary advantage. “In caveman times, you might die if you lost everything,” says Sekoul Krastev,


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