How to Overcome Biases In Financial Situations

We all have biases–cognitive and emotional– that may cloud our judgment when making day-to-day decisions, especially about our finances.

We often depend on our intuition, but sometimes we are unaware of how our gut feeling may be faulty. These biases affect how we think, act, and make purchases against our better judgment.

Learning how these biases work is a first step to guarding ourselves against becoming irrational when managing money when we want to save, be more rational shoppers, and invest.

1. Endowment Effect Aka Status Quo Bias

Status quo bias arises when we consider going to a different doctor, brand, or hair salon even if they charge better prices.

We may even hold onto to a “losing” stock rather than sell it because we are continually expecting a turnaround that may never come. Status quo is similar to loss-aversion bias which says that what you own is more valuable.

This bias values the present when we are planning for the future. We procrastinate rather than thinking ahead to our detriment. It affects our health, including our financial well-being.

2. Present Bias And Procrastination

A sunk cost is a cost that has already been spent and permanently gone. You don’t have it in your budget. If you are running a business, there are certain fixed costs, like salaries you have to pay.

3. Sunk Cost Fallacy

Ever find yourself prone to first impressions even in the face of adverse news. Many of us consider those early beliefs important, whether it is visiting a new store or website or buying a new brand.

4. The Halo Effect

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