How to Make Better Financial Decisions – What are Your Biases?

Are you familiar with different types of biases and which ones influence you the most? 

Whether you realize it or not, biases influence how you make financial decisions.

In this episode, I break down some of the key biases that most often impact our minds when we’re deciding whether to save, invest, or spend. 

It’s important to remember biases are completely normal and we all have them. Where biases get tricky, however, is when we spend too much time reinforcing our own beliefs and leave curiosity at the door. Entertaining multiple perspectives allows us to gain insight and continue our learning so that we don’t become isolated in our own way of thinking.  

Check out these brief descriptions and how different biases result in different decisions.

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Episode Summary:

Confirmation Bias: We screen everything we hear against our pre-existing belief system, our own beliefs, about what is true. This bias can be dangerous if you’re only surrounded by people who always hold the same beliefs as you, instead of surrounding yourself with people with differing opinions that encourages you to understand their perspective. Note: a recent study about longevity and retirement suggested the number one predictor of a long and healthy life was people who engaged in a lot of conversations with people who have differing points of view.

Loss Aversion Bias: This refers to when we are disproportionately more upset by a loss than we enjoy our gains. Put another way, we are more upset about losing something than we are happy about gaining something. This bias is especially noticeable in the behavior of investors during a market downturn, as well as when the market is rising and investors refuse to sell because of tax consequences. 

Sunk Cost Bias: When we’re working on something, especially when we’ve put a lot of time, money, and energy into it, it’s really hard to end it because we’re considering our sunk costs— how much we’ve already invested in the project or property. Where it gets messy is when we refuse to let go and keep moving forward, we keep spending more time and resources on it, even when we realize it would be better to stop. This bias influences more than just money, it can impact relationships, employees, and business ventures, so be mindful when you know you should pull the plug but feel the urge to buckle down and keep going.      

Omission Bias: Omission bias is the tendency to prefer no action, in ourselves and others.  We would prefer nothing over something that could potentially make things worse. When it comes to financial decisions, we avoid taking any action instead of risking making a mistake, which in turn also keeps us from making a profitable investment. When this bias surfaces, you need compassion for yourself and confidence that you can make the best decision possible in the moment based on the information you have at the time.

Hindsight Bias:  This refers to when you look back and judge outcomes that turn out poorly by blaming yours