During the Oxford Reunion Week, we had the opportunity to audit classes with current students. I signed up for the Psychology, Economic Decisions and Financial Markets class. Today I am going to write about one important takeaway: saliency and how it shapes our decisions.

What is Saliency?

Saliency refers to the property of a stimulus that makes it stand out relative to its surroundings.  This captures an individual’s attention and makes it disproportionately influential in judgment and decision-making. Essentially, it is about how noticeable a feature or piece of information is to us.

Behavioral economics suggests that humans rely on mental shortcuts (heuristics) to make decisions. The Saliency Heuristic proposes that when evaluating options, people overemphasize characteristics or attributes that are highly salient, often neglecting less obvious but potentially more relevant information.

Bad Decisions Due To Saliency

Mutual Fund salesmen, often masquerading as financial advisors, like to pitch funds with excellent past returns. However, the most relevant indicators regarding future fund returns are “boring” items like expense ratios and turnover ratios, terms that are never explained, hardly understood by the average investor, and almost never discussed or shown to them. 

In fact, this is the primary value of my second opinion review – among other things, I examine your portfolio and show you all of your hidden costs. If you are still not convinced, read this example of how one of my reviews uncovered $56k of hidden costs in a $4mm portfolio: https://investment-fiduciary.com/2024/08/23/what-hidden-costs-a-portfolio-review-can-reveal/

Perception of Risk Distorted by Saliency

The way saliency distorts our perception of risk is important, too, but let that be a subject for another day.  

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