Investors are routinely warned about allowing their emotions to influence their decisions. However, they are not often cautioned about the preconceptions and biases that may also color their financial choices.
In a battle between facts and biases, our biases may win. If we acknowledge this tendency, we may be able to avoid some unexamined choices when it comes to personal finance. It may actually “pay” to recognize our blind spots and biases when investing. Here are some common examples of bias creeping into our financial lives.
Letting emotions run the show.
How many investment decisions do we make that have a predictable outcome? Hardly any. In retrospect, it is all too easy to prize the outcome of a decision over the wisdom of the decision itself and, therefore, to believe that decisions with the best outcomes were the best decisions. That is not necessarily true.
Putting some distance between the impulse to make a change and the action you want to take can help you gain perspective on how your emotions affect your investment decisions.1
Valuing facts we “know” & “see” more than “abstract” facts.
Information that seems abstract may feel less valid or valuable than information related to personal experience. This can influence how we think about different types of investments, the state of the markets, and the health of the economy.1
Valuing the latest information most.
The latest news can seem more valuable than older information in the investment world. But when the latest news is consistently good—or consistently bad—memories of previous market conditions may become too distant.
If we are not careful, our minds may subconsciously dismiss the eventual emergence of the next market cycle.1
Being overconfident.
The more experienced we become at investing, the more confidence we may have in our investment choices. When the market is going up and a clear majority of our investment choices work out well, this can reinforce our confidence, sometimes to the point where we may start to feel that we can do little wrong, thanks to the state of the market, our investing acumen, or both. This can be dangerous.1
The herd mentality.
You know how this goes: If everyone is doing something, they must be doing it for sound and logical reasons.
The herd mentality can lead some investors to buy high and sell low. It can also contribute to panic selling. The advent of social media hasn’t helped. Above all, following the herd can encourage market timing, and attempts to time the market can influence an investor’s overall performance.1
Sometimes, asking ourselves what our certainty is based on and taking time to reflect can be helpful and informative. Examining our preconceptions and biases may help us make more thoughtful financial choices as we invest.
Conclusion
Recognizing our biases can help us make more thoughtful financial decisions. While we cannot eliminate every bias, understanding how our assumptions and emotions influence our choices can help us invest with greater perspective and discipline. At SHJ Wealth Advisors, we have spent more than 30 years helping individuals navigate the financial markets and stay focused on their long-term goals. If you’d like to learn more, please reach out to Info@shjwealthadvisors.com to schedule a conversation with one of our CFP® professionals and thanks for reading!
- Investopedia.com, May 27, 2025
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.
