Each of us wants to put our best foot forward when it comes to our investments. Although investors often take some sort of an action (buy, hold, or sell) following a decision, they seldom stop to consider the factors that led to their choice.
The investing decisions made by corporate leaders are susceptible to the same behavioral biases as those made by the average investor. These preferences have an outsized impact on C-suite executives whose salaries are heavily weighted toward stock options.
There are a few different types of prejudice that can get in the way of the efficient administration of equity awards:
If you have any questions about managing your equity holdings and wealth management, please contact GLP Financial Group.
Preference for the Status Quo
Let’s pretend you’re offered a $500,000 cash bonus instead of Restricted Stock Units. If you received a bonus, would you invest it immediately in the stock market? Most of the time, “no” is the correct response. Few employees choose to liquidate vested RSUs right away. They choose to slowly build up a stockpile instead. In this case, the status quo bias is the underlying prejudice in behavior.
The effects of FOMO and recency bias
Executives may cling to their shares of the company’s stock for fear of missing out on future profits. Unfortunately, I’m unable to make a sale at this time. The stock price is starting to move!
To prevent the disappointment of selling stock too soon, people are biassed in this direction. Recency bias causes people to put more faith in the recent performance of an asset than is warranted. Having a severe case of FOMO (fear of missing out) on potential future benefits is not uncommon. Colleagues’ boasts about Wall Street experts’ overblown price expectations might exacerbate FOMO.
The cognitive bias known as “anchoring” occurs when a person places too much weight on an initial piece of data while making subsequent judgments.
Humans do not voluntarily give in to their biases in conduct. Since they are hardwired into every human being, we have no choice but to accept them. However, being cognizant of these biases while handling stock awards might mitigate their effects. If you want to be sure your stock investment selections are well-informed and based on solid data, it’s a good idea to work with a professional adviser. A good adviser can assist their customers see the motivations behind their choices and point them in a more rational direction.
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