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:

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 yourself and believing you made a bad decision, thinking that you should have seen it coming. In reality, there’s no way to predict every single outcome of the financial decisions you make, so it’s imperative that you stop hindsight thinking as soon as it shows up. Be kind to yourself and remember you had all the right intentions to make the best decision. We can’t let past mistakes mess with our brain or our future. 

I hope learning about these biases builds your awareness as you navigate your financial journey. 

In this episode, you’ll also hear:

• Understanding that having all the facts doesn’t always make you right
• Why lost time and energy shouldn’t consume more time and energy
• How blame and shame have no place in financial decision making

Must-listen moments: 

[00:08:05] The danger of this bias is that we can become polarized and we can move farther away from each other. We're in danger of replacing curiosity with digging in our heels and wanting other people to agree with us, instead of being curious and learning about what they might be believing in now.

[00:24:40] Anything that we've invested time and energy into, it is hard to cut ties.

[00:30:06] We have to have compassion for ourselves and confidence that we're going to make the best decision we can in the moment, based on the information we have at the time. If things eventually go sideways, it's still good because you made a decision to do something as opposed to doing nothing.

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Follow Danette Lowe on LinkedIn: 

https://www.linkedin.com/in/danette-lowe-cfp%C2%AE-9b7bb716/

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