Impact Bias – Overestimating future feelings


Impact Bias – Overestimating future feelings

The impact bias, a form of which is the durability bias, in affective forecasting, is the tendency for people to overestimate the length or the intensity of future feeling states.

http://en.wikipedia.org/wiki/Impact_bias

Impact bias is the tendency to overestimate the length or the intensity of future feelings in reaction to either good or bad occurrences.

People always overestimate the initial feeling will last for very long time, than it will actually be in the future.

When we think about some emotional event, we tend to over-estimate how strongly we will feel, how long this will last and other factors that impact us. This applies to both negative and positive events.

We humans are often poor at predicting how future events will affect us emotionally. We usually overestimate how the future events will affect us. Research shows that most of the time we don’t feel as bad as we expect to when things go wrong. Similarly we usually don’t get quite the high we expect when things go right for us.

‘Focalism’ – the tendency to magnify the importance of one thing until it overshadows everything else.

People think too much on the impact of future events, but, they forget about all other things and events that are going on in their lives. Actually, the one event to which you are giving too much weightage may be overshadowed by other events that happen at the same time in our lives. We often forget that there are various events that my come in future which will mitigate the current events’ impacts.

The fear of something bad happening or the eager expectation of the good happening often amplifies the mind’s expectation of how we will feel if it may happen, but, often the expectation does not match reality.

Both Impact Bias and Focalism distort reality, drives to bad decision making.

Impact Bias examples

  1. Lottery winners initially feel so excited and will expect that feeling will last forever. But, after a few months or years, that feeling fades off due to various other events in their life.
  2. Once the spouse passes away the partner will feel very bad and mostly thinks it is end of life and just have to drag on for remaining part of their life, but, after few years, they come back to normalcy as they get other events overshadowing this
  3. Sports fans are generally not as happy as they expect when their team wins.
  4. A parent will feel very bad if something happens to their kids, they will have the impact too bad and will expect it to last for years to come. But, actually after few years, once they see their kid growing up like any other kids, they are back to normal.
  5. Love failures – we have heard stories of how people were sad when their love fails, and situation forces them to marry someone else, but, after years, the feeling fades away.

Overcoming Impact Bias

  1. Realise that ‘Time’ is the best long term medicine – as days, months, years pass by, time will heal everything
  2. Always think any feeling – the level of joy or sorrow are only a temporary
  3. Have faith in future – there are a lot more events in future that may change how you feel
  4. You may quickly rationalise any event, thereby reducing the emotional impact

My experience with Impact Bias

During my early days of investing I had made a lot of mistakes and lost a decent sum, and was feeling very bad losing a hard saved money. I thought I would never enter stock markets again.

After a couple of years, I was interested again, but, this time I decided to read, discuss and understand about personal finance and then took the plunge. Now I do better than before. 🙂

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Filed under Behavioural Finance

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