7 emotional biases that are derailing your financial plan

By Mary Chapman, CFP

Emotional biases are the instinctual feelings that influence the decisions we make. They are generally not based on thoughts or beliefs. They are often behind the split-second decisions we make. We all have them. That’s not always a bad thing; however, since these biases are based on our experience and emotions, left unchecked, they can derail a financial plan. One way to overcome this is to be aware of it, know yourself, and get help to overcome those you are more susceptible to. Here is a list of emotional biases and what to watch out for.

Mary Chapman

  1. Loss aversion: In general, people fear a loss more than they appreciate a gain. In other words, most people would rather not lose $10 than randomly find another $10. In the world of finance, it can prevent a person from taking a loss and moving on when needed. Rather than seeing loss as a learning opportunity, people may wait too long in hopes of avoiding a loss. This can skew a portfolio and ironically cause other strategies and opportunities to be lost while waiting for the initial loss to recover.
  2. Overconfidence: This can lead an individual to overestimate their abilities and overestimate their knowledge. There are eight different areas of knowledge that make up a complete financial plan and hundreds of assumptions. A change in just one of them can significantly affect the outcome of the plan. In addition, laws and markets are constantly changing. It’s always a good idea to get a second opinion from a CERTIFIED FINANCIAL PLANNER MT practitioner when planning your financial future.
  3. Self-control bias: It basically means a lack of self-control. This is when an individual seeks instant gratification rather than waiting for the longer term reward. This can result in not saving enough to meet an individual’s goals or taking on too much risk. One of the most powerful ways to overcome this is to become crystal clear about your purpose and why. Then, create habits woven into your daily routine that reinforce your accomplishments to make your goal a reality.
  4. Status quo bias: It is a fear of the unknown that causes us to miss the opportunities offered to them. It can cause someone to cling to something too long and prevent them from exploring new options. This bias can be particularly difficult to overcome; Sometimes educating yourself about the risks and rewards can help.
  5. Staffing bias: Have you ever heard of the saying “a bird in the hand is worth two in the bush?” This is an endowment bias, and while not necessarily a bad thing, it can lead to overvaluing what is already owned. This can lead to an inaccurate assessment of one’s financial situation.
  6. Regret aversion bias: It is the inaction caused by a paralysis of fear. Usually, only their actions are considered and the loss caused by inaction is not taken into account. Rather than act and regret it, we will not act when necessary. This can lead to underperformance in a financial plan.
  7. Affinity bias: We all have affinities, but letting them make the financial planning decisions can wreak havoc on a plan. Just because we have an affinity for a company or product doesn’t mean it’s a wise financial decision. If you find yourself with such an affinity, ask yourself why and seek analysts and other professional assessments.

If any of these appeal to you, talk to your financial planner. The key to overcoming any of these biases is to have a well-designed plan and stick to it. This will avoid decision fatigue in the moment and give you a greater chance of success. Plus, work with a CERTIFIED FINANCIAL PLANNER MT professional can help you overcome bias and stay on track.

About the Author: Mary Chapman, CFP®

Mary Chapman is a CERTIFIED FINANCIAL PLANNER™ Practitioner. She has 25 years of experience working with global teams including GE and BMW, and is now Chief Operating Officer and Director of Financial Planning for Cummings Wealth Management Group. She also teaches financial planning at the College of Charleston. She earned her Master of Science in Counseling and her Bachelor of Science in Financial Management.

She brings her passion for helping people, her analytical skills, and her diverse backgrounds to everything she does. She enjoys helping people make sense of complexity and charting a path forward.

When not working on finances, you can find Mary, a cancer survivor, actively volunteering in her community. She specializes in the arts, crisis counseling and adult education. She also offers pro bono financial planning services to families affected by cancer. She is passionate about transforming the complex into simple and accessible steps.


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