One of the challenges of financial planning is its complexity. Not only is it mathematically layered, but it’s also fraught with bias and emotional influence. For most of us, we only scratch the surface of about seven areas of financial planning and allow experts to make recommendations and decisions that will hopefully create a better financial position for us in the future.

When it comes to investing (just one area in about seven), there are loads of biases that can either help or hinder the protection and growth of our assets. This makes asset management and investment planning a constantly evolving landscape and requires several types of niche specialists.

Anchoring is a cognitive bias that often comes into play when we are trying to establish the value of something.

This doesn’t only apply to investing – it applies to commodities and services across the board. Every day, we rely on the anchoring bias to help us form a perception of value, from standing in the fresh foods aisle to standing in a second-hand car lot or calling around to find a plumber to fix a leak.

“People make estimates by starting from an initial value that is adjusted to yield the final answer,” explained Amos Tversky and Daniel Kahneman in a 1974 paper. “The initial value, or starting point, may be suggested by the formulation of the problem, or it may be the result of a partial computation. In either case, adjustments are typically insufficient. That is, different starting points yield different estimates, which are biased toward the initial values.”

This means that we tend to rely too heavily on the very first piece of information we learn, which can seriously impact the decision we end up making. And, living in a world where we have far more access to information than ever before, complicates our decision-making exponentially.

So – can we avoid it? Well, according to Investopedia, not entirely. Here are some ideas they offer to manage our anchoring bias.

Studies have shown that some factors can mitigate anchoring. Still, it is difficult to avoid altogether, even when we are aware of the bias and deliberately try to avoid it. In experimental studies, telling people about anchoring, cautioning them that it can bias their judgment, and even offering them monetary incentives to avoid anchoring can reduce, but not eliminate, the effect of anchoring.

If you are selling something or negotiating a salary, you can start with a higher price than you expect to get as it will set an anchor that will tend to pull the final price up. If you are buying something or a hiring manager, you would instead start with a lowball level to induce the anchoring effect lower.

Ultimately, if we can’t avoid anchoring, we should at least try to use it to our advantage. In financial planning, we have a process called due diligence. This helps us obtain as much relevant information as possible to a specific decision to help us create a close-to-accurate anchor.

One of the early appeals for cryptocurrencies was that they would not be taxed as they are not fiat currencies (yet), in that they are not owned by a country or used for trade inside of geographical tender regulations.

However, as these platforms grow and develop, we are seeing that this is most likely not the case. According to several governments, cryptocurrencies, such as Bitcoin, are classified as “intangible assets” – as opposed to, say, property or currency. 

These definitions differ slightly in different regions, but for the most part, gains or losses related to cryptocurrencies can be classified into three categories or scenarios, each of which could result in different tax consequences:

1. A cryptocurrency can be acquired through so-called “mining”. Mining is conducted by the verification of transactions in a computer-generated public ledger, achieved through the solving of complex computer algorithms. The “miner” is rewarded with ownership of new coins by verifying these transactions, which become part of the networked ledger. This gives rise to an immediate accrual or receipt on successful mining of the cryptocurrency. This means that until the newly acquired cryptocurrency is sold or exchanged for cash, it is held as trading stock, which can be realised through either a normal cash or barter transaction.

2. Investors can exchange local currency for a cryptocurrency (or vice versa) by using cryptocurrency exchanges, which are essentially markets for cryptocurrencies, or through private transactions.

3. Goods or services can be exchanged for cryptocurrencies. This transaction is regarded as a barter transaction. Therefore the regional barter transaction rules apply. 

While the initial receipt of cryptocurrency from mining is classified as income for tax purposes, revenue services may apply a distinct set of tax rules to the cryptocurrency’s subsequent disposition. Short-term trading to generate daily wages is considered income for tax purposes, but long-term investments (usually exceeding three years) are subject to capital gains tax. 

We are already reading reports of treasuries extending their cryptocurrency audit and detection services by many global media outlets. In addition, some have publicly listed employment opportunities geared explicitly towards cryptocurrency tracking.

According to recommendations, taxpayers who treat cryptocurrency transactions in a way that is inconsistent with their respective tax laws may face penalties. As a result, you must stay up to date on the newest developments in crypto tax legislation if you own crypto.

Dualistic thinking assumes a universe where there are only two opposing, mutually incompatible options or realities. This type of thinking is either/or, good/bad, negative/positive, and has a significant impact on our beliefs and behaviours.

Our development is stymied by dualistic thinking. The sooner we can break free from this either/or mindset, the sooner we can nurture greater success in the workplace and in our personal lives.

This either/or mentality contributes to our fears and concerns by presuming the false restriction that no other choices exist. We might feel confined, perceiving little freedom when we think in this way.

We may feel trapped or powerless in a circumstance when our options, choices, and determination appear to be limited. We tend to react emotionally in such cases, sometimes not even aware of the reasons why. 

Dualistic thinking hinders our personal and professional progress because we rarely allow for a range of options. We rate the situations and people around us on a binary scale. We reduce our capacity to see alternative possibilities by limiting ourselves to only two options.

Our psychological bias is a significant hazard of dualistic thinking. The “snake bite” effect, for example, occurs when an investor has a bad experience with an investment that causes them to be more cautious in future investment decisions, lowering their return potential.

The fear of regret and feeling like we have made a decision that is inherently ‘wrong’ leads to this bias. One way to counter this effect is to adopt a strategy that closely adheres to predetermined investing criteria and eliminates most of the decision-making process on what to purchase, when to purchase, and how much to purchase.

Using rules-based trading techniques decreases the likelihood of an investor making a discretionary decision based on previous investment success.

We create unrealistic expectations when we consider simply “good” and “bad”. Whatever decision you make will have implications, some of which will be unexpected.

Those implications may appear to be a choice between what you leave behind against what you get, or there may be aspects of both that you appreciate. It’s crucial to recognise that it’s often impractical to expect our actions to only have two possible outcomes; we should always look for a third outcome to help balance our expectations.

Once we have realised this, we can concentrate on what appears to be the best course of action for our personal circumstances.

One long-held belief is that lemmings purposefully run off cliffs in their millions. This myth has become a metaphor for the behaviour of crowds of individuals who follow each other blindly, regardless of the consequences. Herd instincts are prevalent in all parts of life, including the financial industry when investors follow what they feel other investors are doing rather than conducting their own research.

A herd instinct is a type of behaviour in which people react to and follow the activities of others. This is comparable to how animal groups react to danger – whether real or imagined.

Following the crowd or herding can lead trends to amplify well beyond fundamentals. Prices can skyrocket when investors flood into ventures for fear of losing out or because they have heard something positive but haven’t done their own due research.

This unreasonable optimism can lead to asset bubbles that eventually burst.

In the opposite direction, sell-offs can lead to market crashes when people rush to sell simply because others are doing so, a phenomenon known as panic selling.

If most people are heading in one direction, an individual may feel as if they are making a mistake by walking in the opposite direction. They may also be afraid of being singled out for refusing to join the bandwagon. Although herding is instinctive, there are strategies to avoid following the mob, especially if you believe you will be making a mistake. It necessitates self-discipline as well as a few considerations:

• Doing your own research is essential; study the facts and data and draw your own conclusions. Once you’ve completed your due diligence, then you can look at other people’s interpretations.

• Inquire about how and why individuals are doing things. Are they making decisions based on the movement of the herd? If you believe it is the wrong decision for you, don’t be afraid to go against the grain.

• If you’re distracted or emotionally charged, whether from stress or external factors, postpone making decisions.

Making investing decisions based on logical, objective criteria and not allowing emotions to take over is a solid strategy to avoid herd instinct. Another option is to use a contrarian approach, in which you purchase when others are panicking, taking advantage of bargains, and selling when excitement leads to overvaluation. As Jonathan Sacks once said, “The wisest rule in investment is: when others are selling, buy. When others are buying, sell.”

At the end of the day, it’s human nature to want to fit in, so resisting the impulse to stray from your plan might be challenging. This is where financial planners step in, serving as a sounding board for your decision-making process.

There’s a story that was told many years ago (it may or may not be true…) about a Microsoft call-centre agent and their call with a deeply irate customer. Having recently purchased a computer that came pre-installed with Windows, the customer called to find out why his computer would not respond.

It goes a little like this:

Call-center Agent (CCA): Thank you for verifying your purchase; how can we help you today?

Customer (C): My computer isn’t responding, and I’ve tried everything!

CCA: Thank you for that feedback. What do you see on your screen?

C: Nothing!! Absolutely nothing!

CCA: Please press control, alt and delete together. Has that helped?

C: No – nothing has happened. I’ve tried all of this already!!

CCA: Is there an error message on your screen?

C: No – the screen is just black.

CCA: Is your screen on? Do you see the power light on in the bottom corner?

C: No – there is no power light on. (becoming more amiable) I don’t think the screen is on.

CCA: Is it plugged into the back of your computer correctly?

C: Hold on, I’ll follow the cable and check. (a few seconds pass) I can’t see behind the computer; it’s too dark.

CCA: Are you able to turn the lights on to check?

C: No, I can’t; we’re currently having load-shedding.

Sometimes, our biggest problems are our most basic problems. And, we can’t always see them ourselves until someone else reminds us. When it comes to financial planning and managing our money, it’s easy to become side-tracked by big ideas, fancy strategies, forecasting and spreadsheets, and overlook the basic starting blocks of budgeting. We miss what’s happening right in front of us.

Budgeting helps us stay connected to what’s happening with our money right now. So – why don’t we do it religiously?

Carl Richards, a regular contributor to the New York Times, shares some reasons for why we allow this to happen.

1- It’s not fun.

True. But remember, as Stephen Covey says, “If the ladder is not leaning against the right wall, every step we take just gets us to the wrong place faster.” Budgeting is how we make sure our spending ladder is leaning against the right wall.

2- I already know where my money is going.

No, you don’t. Sorry. Unless you track your spending, you don’t have a clue where your money goes. Everyone I’ve ever seen go through the process of tracking spending for 30 days usually ends up saying some version of, “I had no idea I was spending that much on X.”

3- I’m not sure I want to know.

I think this is the biggest mental hurdle. The reality is that as we become aware of what and how we’re spending, we’ll find some things that surprise and bother us. Then we have to decide: Do we want to change?

Carl goes on to suggest four ways to get back to the basics of budgeting:

1- Try tracking your spending for 30 days.

2- Don’t stress about what app to use.

3- Just carry around a pen and a little notebook, and each time you make a purchase, write down what you spent and how it made you feel.

4- At the end of the month, go back through your notebook and just notice. Become aware. That’s it.

The glamorous side of managing our money is making purchases that make us feel better – not in tracking our spending. But, the feel-good side of managing our money is in regaining and maintaining control of what we can do with our money, which starts with budgeting.

As Carl said, it’s not about making significant changes. At first, it’s just about becoming more aware and noticing what’s going on, noticing things that we may have missed or overlooked. 

The result is that we will be more mindful and have more control over our money; and that’s worth knowing.