We don’t always make the most rational decisions. We have constraints, and our comfort levels vary in response to uncertainty, which is not considered in traditional economics.

1. Financial Advisors Need to Know
7Emotional
Biases
September 2017

2. All humans are likely to hold some “biases,” which just means:
We don’t always make the most
rational decisions. We have
constraints, and our comfort
levels vary in response to
uncertainty, which is
not considered in
traditional economics.

3. Biases are generally classified as either:
Cognitive biases are
caused by errors in
calculation or faulty
reasoning.
COGNITIVE EMOTIONAL
Emotional biases
come from “impulse,
intuition, and
feelings.”

4. ©tamuc via Flickr
Though biases
cannot be eliminated,
your ability to
distinguish between
which clients will
benefit more from
education and which
clients are more
prone to feel
uncomfortable with
loss/missed
opportunities, will
help you achieve
better outcomes
for your clients.

5. An understanding of the different types of biases equips you to manage
investment plans more appropriately and communicate more effectively
with your clients. While education can work more quickly to address
cognitive biases, emotional biases are often more persistent because
their actions are based upon feelings rather than facts.

6. 7different emotional biases that
you should look for in your clients.
Here are

7. Endowment
1
Investors value an
asset more when they
possess it and are
faced with losing it
than when they don’t
possess it and have the
potential to gain it.

8. Investors tend to
strongly prefer avoiding
losses, as opposed to
achieving gains.
Psychologically, the possibility of a loss is twice
as powerful a motivator as the possibility of a
gain of equal magnitude.
Loss Aversion
2

9. Regret Aversion
Investors tend to
avoid making
decisions out of
fear that the
decisions will turn
out poorly.
3

10. Overconfidence
Investors are more
confident in their own
decisions & abilities
than is objectively
warranted.
4

11. Investors tend to take
credit when an
investment goes up,
Self-Attribution
but blame outside
factors when an
investment goes down.
5

12. Investors tend to have a
lack of self-discipline
when it comes to making
financial decisions.
Self-Control
6

13. Status Quo
Investors tend to do
nothing instead of
making a change.
These clients prefer the comfort of keeping things the same, even
when a change would be beneficial.
7

14. 7Biases
Where do your clients fall?
Endowment1
Loss Aversion2
Regret Aversion3
Overconfidence4
Self-Attribution5
Self-Control6
Status Quo7

15. Our Behavioral Risk Survey is designed to surface each client’s behavioral biases and willingness to
take risk, which combine to determine their unique investor persona. Then, our communication helps
you easily navigate their biases to improve their outcomes and grow your business.
Schedule a Demo
to Learn More
Find out with Finworx!

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