12 Cognitive Biases That Impact Your Finances

Cognitive Biases

By Jeff Smith

A cognitive bias is an error in reasoning or memory that affects judgement and decision-making. They commonly occur as we hold on to our preferences rather than rationally assessing a situation from an objective point of view.

In finances, cognitive biases can cause us to make decisions that are detrimental to our financial wellness, such as saving less, spending more, and making overconfident or rash decisions when we aren’t fully informed.

Making decisions is hard — especially ones that majorly impact our wallets. With so much room for cognitive error, it’s no wonder that seven in ten Americans postpone making financial decisions, and over half haven’t made a major money move in the past three years.

When we’re not careful, cognitive biases can tank credit, worsen debt, and suck savings dry. For example, in one study, one-third of investors continued to over-confidently spend money on a project — even after receiving diagnostic advice that it was no longer wise.

If at this point you’re not feeling too confident about your financial future, fear not. Once you start recognizing your own cognitive biases as they come up, some simple tweaks in mindset will put you back on the path to financial prosperity.

To help, we’ve put together a guide of the most common cognitive biases that impact our finances and how to avoid them.

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Sources: The Simple Dollar | Business Insider | NerdWallet | The Balance | WalletHacks | Business Wire | Visual Capitalist | Journal of Behavioral Decision Making | Buffer Blog |

About the Author

Jeff Smith is the editor of the Self Lender blog.

Written on December 11, 2018

Self Lender is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@selflender.com.

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