Daniel Crosby, chief behavioral officer at Brinker Capital, distilled an overwhelming universe of behavioral biases into four comprehensive areas that investors should keep in check.Crosby says ego, emotion, conservation, and attention are the psychological areas that have the ability to uproot rational decision making.He says the way to mitigate these biases is to automate investing, including buys, sells, and rebalances.Click here for more BI Prime stories.The ability to mitigate the impact biases have on investment decisions is arguably one of the most important attributes a money manager can acquire. However, it's easier said than done as many of these biases are ingrained in human nature.But Daniel Crosby, chief behavioral officer at Brinker Capital, thinks he has it figured out. And he should knowhe's a clinical psychologist, Ph.D., and a New York Times bestselling author to boot.Early on in his clinical practice, Crosby found his circumstances to be taxing and taking a toll on his well-being. He soon took his admiration for human behavior and focused his efforts into the "mind and markets.""There's these four biases that I've coined," he said on Millennial Investing. "I looked at the research into investor bias and found that there are over 177 different cognitive errors that we fall prey to."As one would imagine, having a checklist with 177 different boxes on it is a bit cumbersome. This drove Crosby to dissect the errors one-by-one. And, thanks to his clinical background, he was able to identify a few common threads in the process."They're not all that different," he said. "I feel like if we can develop frameworks for keeping those things in check your sort of on your way."Let's take a closer look at the four biases Crosby says can undermine sound investment decisions.1. EgoInvesting is one of those tricky areas where an abundance of brain power doesn't necessarily translate directly into an abundance of returns. In fact, an excess of knowledge, information, and acumen may actually hurt returns.Think that's not true' Consider the fact that after 10 years, nearly 85% of active managers underperform the S&P 500, according to a study from S&P Dow Jones Indices. If we move out to the 15 year mark, almost 92% underperform. Markets consistently humble those with the deepest convictions.Crosby categorizes ego simply when he says it's "this tendency of ours to be overconfident."He ultimately argues that minimizing your ego is crucial to investing. The purchase you're extremely confident in may end up a dud. Instead of a discretionary process, he recommends adhering to a rules-based strategy, then diversify.2. Emotion"Human beings are the fundamental units of capital markets," Crosby said. "We are the ones that determine the worth of the different things we trade."The most successful investors of all time are notoriously even-keeled. They understand their risk tolerances, time horizons, and future goals. What's more, they put systems in place and strictly adhere to them.Crosby characterizes emotion as our "tendency to let our heart run away with our head."Let emotion play a big role in your investing career and there's a very good chance you'll be buying at tops and selling at bottoms, according to Crosby.3. ConservatismCrosby says conservatism is "our tendency to be sort of lazy and prone to the status quoand being risk-averse."Loss aversion and familiarity play large roles in this area.It's no secret that investors hate losses. In fact, some studies suggest that losses are twice as powerful as gains from a psychological standpoint. This phenomenon generally results in inaction, as investors ride losing stocks lower and lower, rather than cut their losses short.What's more, investors tend to see less risk in things that they're familiar with, which can lead to overweights in sectors and stocks that are less than ideal.We see this notion play out when investors hold large quantities of stock options through their employer. This leads to concentration risk. Not only are they exposed to the stock, their income source is also at risk. Examples that immediately come to mind are companies like Lehman brothers and Enron.Having a long-term time horizon and thinking in a probabilistic manner may help to mitigate this bias, Crosby says.4. Attention"Which is the tendency for us to evaluate the likelihood of something not on how probabilistic it ismathematically speakingbut how salient it is psychologically," he said.At any given point in time, the uncertainties prevalent in markets are countless, yet the market's attention is generally focused on only a handful of factors. Sometimes, these fears are warranted, other times they're more bark than bite.However, our attention is subsumed by them regardless.Remember when recession fears were the highest they were since the Financial Crisis just a few months ago' Now these talks have all but dissipated.Peter Lynch, legendary manager at Fidelity's Magellan fund, demonstrated the affects of the attention bias perfectly when he said "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves."With all of that under consideration, Crosby offers up his best piece of advice for investors that are trying to quell the nefarious effects their emotions and biases have on their investment decisions."Automate," Crosby concluded. "Automating what you hold, the type of things you hold, when you rebalance, when you buy, and when you sell."He added: "Ninety-four percent of the time, following the rules meets or exceeds the outcome of making a decision just in the heat of a moment."SEE ALSO:A retiree living at the poverty line explains how he squandered his 401(k) ' and shares how today's generation of young professionals can avoid his fateJoin the conversation about this storyNOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption
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