Most people assume they make financial decisions based on facts and logic, and mostly, that’s true – right up until a mental shortcut quietly steers the conclusion before the facts get a fair hearing. Psychologists call these shortcuts cognitive biases: processing errors that come from how memory, attention and judgement actually work, rather than how we’d like to think they work. They affect everyone, financially literate or not, and they’re often invisible in the moment. Here are five of the ones most likely to affect a financial decision.
1. Confirmation bias
Once you’ve formed a view – that a particular investment is a good idea, say – confirmation bias makes you more likely to notice and accept information that supports it, and to dismiss or downplay information that doesn’t. Research is still worth doing, but it stops being useful protection against a bad decision if you’re unconsciously filtering it for things you already wanted to hear. The practical fix is a deliberate one: actively look for the strongest argument against a decision you’re leaning toward, rather than only the arguments for it.
2. Anchoring bias
First identified experimentally by the psychologists Amos Tversky and Daniel Kahneman in the 1970s, anchoring is the tendency to lean too heavily on one piece of information – often simply the first number you saw – when making a judgement. For an investor, the anchor is often the price you originally paid for something. If a holding has fallen well below what you paid for it, that original figure can keep feeling like the “real” value long after the market has decided otherwise, making it harder to judge objectively whether to hold, sell, or top up based on where things actually stand today rather than where they started.
3. Framing bias
The same facts, presented differently, can lead to very different decisions. Told there’s an 80% chance an investment succeeds, most people feel reasonably comfortable; told there’s a 20% chance it fails – mathematically identical – many feel considerably more cautious. Neither framing is dishonest, but it’s worth noticing which version you’re being given, and deliberately reframing it the other way yourself before deciding, so the decision reflects the actual odds rather than how they happened to be phrased.
4. Small-sample thinking
Faced with a decision that feels overwhelming, it’s tempting to reach for whatever evidence is closest to hand – what a friend’s savings account pays, or how one sector has performed over the past few months – and treat it as more representative than it really is. What worked for a friend’s circumstances may not suit yours, and a sector’s recent run says very little about where it’s headed next. Small samples like these can feel like solid evidence when they’re really closer to a coin flip that happened to land a particular way a few times in a row.
5. Loss aversion
Loss aversion is one of the best-known findings in behavioural economics, going back to Kahneman and Tversky’s Nobel Prize-winning work on prospect theory: broadly, that losses tend to feel more painful than equivalent gains feel good. Their original research suggested losses might be felt roughly twice as intensely as gains of the same size, though more recent studies suggest that exact multiplier varies considerably depending on the amount involved, the type of loss, and how experienced the person is – it isn’t the fixed universal rule it’s sometimes presented as. What holds up consistently is the underlying pattern: a 5% portfolio fall tends to register more strongly than a 5% rise, even though both move you the same distance from where you started. Left unmanaged, that asymmetry can nudge people toward being more cautious than their actual goals and timeframe call for, potentially at a real cost to long-term returns.
Spotting bias in your own decisions
Noticing your own bias in the moment is genuinely difficult – these shortcuts exist precisely because they don’t feel like shortcuts from the inside. An outside perspective tends to help more than trying harder to be objective alone, since a financial planner isn’t working from the same anchors, frames or recent experiences that might be quietly steering your own view.
As financial planners based in Poole, we work with clients across Bournemouth and the wider Dorset area to build a financial plan that reflects your actual goals and circumstances, and to provide a sounding board when a decision might be more influenced by bias than you realise. If you’d like a second opinion on a financial decision, we’re always happy to have a no-obligation conversation.
Get in touch if you’d like support making a decision with a clearer head.
This article is for general information only and does not constitute advice. The information is aimed at retail clients only. All information is correct at the time of writing (September 2026) and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.