The High Cost of Bad Behaviour

Behavioural finance, the idea that we make choices based on intuition and emotion more than rational thought, helps us understand what drives our decisions – our biases, fears, and overall feelings about money. But emotion and intuition rarely pave the way for sound decision-making.

The need to make decisions, big or small, is present every day, including choices about money. From saving and investing to paying down debt, making the “right” decisions is not always black and white.

If you want to avoid making costly mistakes with your financial planning, here are the things you will need to understand.

Identifying Behavioural Biases

No matter how rational you think you are, we are all human and act on emotion from time to time.

Several biases, or triggers, are built on this premise, here are some of the most common that relate to your money:

  - Overconfidence: the tendency to place too much confidence in your choices about money (like when we found that one ‘star’ fund manager)

  - Anchoring: using old, outdated information or rules of thumb to justify past decisions

  - Representativeness: making connections that aren’t really there (Trump won the election, the market went up, so that must be good for the economy, right?)

  - Loss aversion: a reluctance to accepting loss, even if it’s costing you money (I won’t sell it now, because it’s sure to come back)

  - Regret reduction: avoiding certain actions so regret is not an option

  - Blind spots: failing to see the behaviours that hold you back


Each of these biases in financial decision-making can cost you significantly. For example, being overconfident about your goals may mean you fail to spot check them periodically, which could mean falling short of your objectives.

Failing to see the missteps in your financial behaviours or the holes in your plan may result in not saving nearly enough or continuously selecting the wrong investment.

Likewise, holding on to a poorly performing investment simply because you don’t want to realise the loss can mean even bigger losses down the line.

If you’re avoiding regret, it usually means you’re not taking the right actions to reach your objectives. You may have been burned by the market before and are sitting on the sidelines waiting for your time to get in. But the evidence shows it’s ‘time in the market’, not ‘timing the market’ that really counts.

Biased short-term perspectives based on emotional responses result in lost opportunities, wasted costs, and more importantly, unhappy and subpar investment returns.

How To Overcome Your Behavioural Biases

So, how do you overcome behavioural pitfalls with your financial planning?

First, you have to recognise that decisions based on emotions are likely to be poor decisions.

For instance, according to behavioural finance research, by focusing your attention on emotional feelings instead of proven, rational methods, this can cost you 4-5% in lost returns on your investments each year. Now that’s an expensive mistake!

Understanding what triggers you to make, or avoid making, certain decisions is the next step. If you see yourself falling into one of these categories, try setting up a list of hard and fast rules that can help steer your next move.

For example, never make investment decisions straight after reading the morning papers. Instead, take some time to cool down and reflect before coming to your decision.

How a REAL Adviser Can Help

If after this, you found that you’re still succumbing to behavioural biases, there is where working with a REAL financial adviser can help

Getting advice from an experienced professional who not only understands these biases but also works to stand objectively in between you and the big mistake is a service worth paying for in its own right.

REAL advisers do just that. We provide unbiased professional advice when it’s needed most – when your circumstances change, when markets are volatile, or when there’s doubt about your future success.