Are You Making These Investment Mistakes Ahead of the 2024 Election?

Election years are a ripe opportunity for misbehaviour. The stakes seem high given the massive change (or lack thereof) looming ahead. Uncertainty hangs in the air, sucking all the oxygen out of the room.

With all these stressors at play, it’s no surprise that our minds are increasing their use of cognitive shortcuts, some of which are sure to lead us astray. As we approach the 2024 election, I’m mindful of some cognitive biases and their consequences.

1. Confirmation bias, which solidifies our existing beliefs.

If someone were to ask me what bias I hate the most, I would probably say confirmation bias. This is our tendency to pay more attention to and more readily accept information that supports our existing beliefs.

The reason for my anger is that even if a person diligently researches a topic to make an informed decision, their brain may be working painstakingly to cling to the research that supports their existing beliefs. In other words, even the best-intentioned investor can fall victim to this bias.

When preparing for an election, we are all likely to be doing some form of research to understand our preferences on key issues. In doing our due diligence, we should recognize that there may be confirmation bias that influences our opinion toward our preconceived notions. Existing research even points out that when we examine evidence that does not support our opinion, we are more likely to be critical of it. On the other hand, we ask fewer questions about the evidence that supports our opinions.

For example, if we see a social media post supporting our preferred political candidate, we may be less likely to question the accuracy and sources of the statistics in the post or the credibility of the author. However, we may be much less forgiving of a post that criticizes our preferred candidate.

Confirmation bias is a conspiracy bias, but we are not completely powerless against it. Before you conduct your research, try to come up with a list of questions to judge the effectiveness of the evidence, and ask those same questions for each piece you find. For example, you might want to make sure that the research study sample is large enough and representative of the United States. Also, make sure you read an equal number of articles that support and oppose your current opinion—this can help ensure that you are at least exposed to diverse opinions.

2. Availability bias, which leads us to believe that this time is different.

Previous research suggests that elections do not have a significant impact on market performance in the medium and long term. In other words, although elections themselves can cause some volatility, it is only in the short term.

If one were to read various media articles that prophesize doom and gloom for certain industries depending on who is elected, this research finding might seem hard to believe. This is because front-page or trending media can be misleading and take advantage of behavioral biases to generate a strong reaction, such as availability bias (our tendency to give more weight to information that comes most readily to mind) and negativity bias (our tendency to pay more attention to things of a negative nature).

These biases lead us to cling to doom-and-gloom media outlets and ignore the fact that these stories have generally not played out in the past. This leads us to believe that this election will be the one to solidify our destiny, even though we probably thought this way in past elections too, and things turned out well.

The best way to avoid these decision-making mistakes is to conduct an information audit. Jot down news and information sites that you believe are unbiased (or as unbiased as possible) and that present well-balanced, factual arguments. Make sure to include sites that both support and oppose your political affiliation. Now, devote your attention to these sites. Don’t click on those flashy articles from questionable sites. Unfollow any influencers with dubious (but somehow popular) claims. Delete any apps on your phone that might lead you to those sought-after but useless publications. For example, I don’t keep the Apple News app on my phone.

3. Scarcity mentality, which drives investors to make decisions under pressure.

An election year puts a deadline on our decisions. “If we don’t make a change before X becomes president, we’re done for!”

This looming deadline and all the milestones leading up to a choice can make investors feel like they are under enormous time pressure when making decisions. Unfortunately, this time pressure can lead to a scarcity mindset: because we feel like we don’t have enough time, we are more likely to adopt reflexive responses, a more limited and concrete style of thinking, and fail to think critically about the problem.

To avoid this decision-making trap, prepare for these supposedly dire circumstances before they occur. For example, implement a trading rule that states that you will not make any changes to your portfolio unless it drops by X%.

And let’s not forget the option of doing nothing at all. As Danny Noonan found in his research, based on historical data, investors are better off ignoring Washington, DC altogether.

The long-term investor wins the race

The presidential election is important and the stakes are high, but investors should remember that regardless of who wins, they are better off staying invested for the long term. As you consider your investment decisions amid the hustle and bustle of an election year, keep these cognitive biases in mind.