Behavioural biases and heuristics

HOW THEY INFLUENCE YOUR FINANCIAL PLANNING

Have you ever made a financial decision you regretted, only to look back and wonder what on earth you were thinking? Maybe you held onto a losing investment for far too long or refused to explore a new financial opportunity because it just didn’t feel right. The truth is that our brains are wired to simplify complex decisions through shortcuts known as heuristics.

While helpful in day-to-day life, these shortcuts can also lead us astray when it comes to managing our money.

One of the most common mental traps is confirmation bias. This is when we seek out information that validates our existing beliefs while conveniently ignoring anything that contradicts them. If you’ve already decided that property is the safest investment, you’re likely to latch onto articles and conversations that support that viewpoint, while dismissing evidence suggesting otherwise.

The problem? Your financial world becomes an echo chamber, reinforcing beliefs that may no longer be serving your best interests.

Then there’s loss aversion—a cognitive bias where the pain of losing is psychologically more powerful than the pleasure of gaining. Nobel laureates Daniel Kahneman and Amos Tversky demonstrated that losses are felt twice as strongly as equivalent gains. This bias often leads to overly cautious behaviour, such as avoiding necessary financial risks or panic-selling investments at the worst possible time.

Think about the investor who sells off stocks during a market downturn out of sheer fear, missing out on the inevitable recovery. Or the person who avoids pursuing a better job because the risk of change feels too daunting.

Anchoring bias is another tricky one. This is when we rely too heavily on the first piece of information we encounter—or any information that feels particularly salient. For example, if you were told that a particular stock was worth $100 a share, you might use that figure as a benchmark, even if the stock's value has drastically changed. Or perhaps you’ve been anchored by what your parents taught you about money, even if those lessons are outdated or irrelevant to your current life situation.

So, how do we overcome these biases and move toward healthier financial habits?

The first step is awareness. If you know that your brain is wired to prefer consistency over change, security over risk, and the familiar over the unknown, you can begin to challenge those biases with intentionality. Instead of simply asking, “What do I believe about money?” ask, “Why do I believe what I believe about money?”

Next, it’s about building frameworks that acknowledge these biases while striving for objectivity. Financial planning isn’t just about number-crunching—it’s about questioning assumptions and creating systems that reduce the influence of cognitive biases on your financial decisions.

When you work with a financial planner, you’re not just getting financial advice; you’re gaining a partner who can help you identify and work through these biases. A good financial plan won’t eliminate your biases, but it will help you make decisions that are aligned with your values and long-term goals, rather than short-term emotional responses.

Because the truth is, we all have biases. But the better we understand them, the more empowered we become to make thoughtful, informed financial choices.