Understanding 4 Key Financial Psychological Biases

Posted on October 19, 2025 by Dr. David Edward Marcinko MBA MEd CMP™

By Staff Reporters

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The following are 4 common financial psychological biases.  Some are learned while others are genetically determined (and often socially reinforced).  While this essay focuses on the financial and investing implications of these biases, they are prevalent in most areas in life.

STOCK MARKET: https://medicalexecutivepost.com/2024/10/13/stock-market-a-zero-sum-bias/

Loss aversion affected many investors during the stock market crash of 2007-08 or the flash crash of May 6, 2010 also known as the crash of 2:45. During the crash, many people decided they couldn’t afford to lose more and sold their investments.

Of course, this caused the investors to sell at market troughs and miss the quick, dramatic recovery.

Overconfident investing happens when we believe we can out-smart other investors via market timing or through quick, frequent trading.

Data convincingly shows that people who trade most often under-perform the market by a significant margin over time.

Mental accounting takes place when we assign different values to money depending on where we got it.

For instance, even though we may have an aggressive saving goal for the year, it is likely easier for us to save money that we worked for than money that was given to us as a gift.

Herd mentality makes it very hard for humans to not take action when everyone around us does.

For example, we may hear stories of people making significant profits buying, fixing up, and flipping homes and have the desire to get in on the action, even though we have no experience in real estate.

CITE: https://www.r2library.com/Resource/Title/0826102549

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EFFECTS: Halo and Hero Placebo

Posted on October 23, 2024 by Dr. David Edward Marcinko MBA MEd CMP™

COGNITIVE BIASES

By Staff Reporters

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The following are two common psychological biases.  Some biases are learned while others are genetically determined (and often socially reinforced).  They are prevalent in most areas in life.

Halo Effect

The halo effect is the cognitive bias where the perception of one positive trait influences the perception of other traits. It’s like assuming a good-looking person is also kind and smart. This mental shortcut simplifies our judgments but often leads to inaccurate assessments.

Marketers and politicians love the halo effect, using it to create a positive overall impression.

To counteract the halo effect, consciously separate individual traits and evaluate them independently. Remember: not everything that shines is gold.

Hero Placebo Effect

The hero placebo effect is the phenomenon where believing in the efficacy of a hero or leader enhances their perceived effectiveness. It’s like thinking a charismatic coach makes the team better just by being there. This belief can boost morale and performance, creating a self-fulfilling prophecy.

However, it can also lead to overestimating the hero’s actual impact. So, while it’s great to have inspiring leaders, remember: true success comes from collective effort, not just the aura of a single hero.

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NINE: Psychological Reasons We Do Dumb Things with Money [$$$$]

Posted on October 20, 2024 by Dr. David Edward Marcinko MBA MEd CMP™

Yep – Even the Smart Folks!

By Lon Jefferies MBA CMP® CFP®

Dr. David Edward Marcinko MBA MEd CMP®

Lon Jeffries

In the Business Insider, Mandi Woodruff describes nine mental blocks that cause smart people to do dumb things. Review the list and itemize the factors that have negatively impacted your finances.

The Factors

  • Anchoring happens when we place too much emphasis on the first piece of information we receive regarding a given subject. For instance, when shopping for a wedding ring a salesman might tell us to spend three months’ salary. After hearing this, we may feel like we are doing something wrong if we stray from this advice, even though the guideline provided may cause us to spend more than we can afford.
  • Myopia (or nearsightedness) makes it hard for us to imagine what our lives might be like in the future. For example, because we are young, healthy, and in our prime earning years now, it may be hard for us to picture what life will be like when our health depletes and we know longer have the earnings necessary to support our standard of living. This short-sightedness makes it hard to save adequately when we are young, when saving does the most good.
  • Gambler’s fallacy occurs when we subconsciously believe we can use past events to predict the future. It is common for the hottest sector during one calendar year to attract the most investors the following year. Of course, just because an investment did well last year doesn’t mean it will continue to do well this year. In fact, it is more likely to lag the market.
  • Avoidance is simply procrastination. Even though you may only have the opportunity to adjust your health care plan through your employer once per year, researching alternative health plans is too much work and too boring for us to get around to it. Consequently, we stick with a plan that may not be best for us.
  • Confirmation bias causes us to place more emphasis on information that supports the opinion we already have. Consequently, we tend to ignore or downplay opinions that don’t mirror our own, leading us to make uninformed decisions.

NOTE: An interesting example of the confirmation bias is the case of David Rosenberg, who is one of the most well-known perpetual bears on Wall Street. In October, Mr. Rosenberg’s analysis forced him to warm to the current investment environment. His fans and followers, rather than appreciating his research and ability to adjust to new information, criticized him for changing his opinion.

As it turned out Mr. Rosenberg had fans not because of his expert analysis, but because he added intellectual heft to his followers pessimism and quasi-political desire for the system to collapse. Their view was that things were in permanent decline and his analysis, charts, and voice added respectability to their pre-existing bias. Mr. Rosenberg has now lost his fan base not because he was wrong for the last four years, but because he changed his mind.

head

  • Loss aversion affected many investors during the crash of 2008. During the crash, many people decided they couldn’t afford to lose more and sold their investments. Of course, this caused the investors to sell at market troughs and miss the quick, dramatic recovery.
  • Overconfident investing happens when we believe we can out-smart other investors via market timing or through quick, frequent trading. Data convincingly shows that people who trade most often underperform the market by a significant margin over time.
  • Mental accounting takes place when we assign different values to money depending on where we get it from. For instance, even though we may have an aggressive saving goal for the year, it is likely easier for us to save money that we worked for than money that was given to us as a gift.
  • Herd mentality makes it very hard for humans to not take action when everyone around us does. For example, we may hear stories of people making significant profits buying, fixing up, and flipping homes and have the desire to get in on the action, even though we have no experience in real estate.

Assessment

The good news is that being aware of these tendencies can help us avoid mistakes. We’ll never be perfect, but avoiding detrimental decisions based on mental prejudices can give us an advantage in our financial and retirement planning efforts.

Conclusion

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HEALTH INSURANCE: Marketing and Behavioral Economics

Posted on February 23, 2024 by Dr. David Edward Marcinko MBA MEd CMP™

DR. DAVID EDWARD MARCINKO MBA MEd CMP

By Staff Reporters

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DEFINITION: Behavioral economics is grounded in empirical observations of human behavior, which have demonstrated that people do not always make what neoclassical economists consider the “rational” or “optimal” decision, even if they have the information and the tools available to do so.

For example, why do people often avoid or delay investing in 401ks or exercising, even if they know that doing those things would benefit them? And why do gamblers often risk more after both winning and losing, even though the odds remain the same, regardless of “streaks”?

CITE: https://www.r2library.com/Resource

By asking questions like these and identifying answers through experiments, the field of behavioral economics considers people as human beings who are subject to emotion and impulsivity, and who are influenced by their environments and circumstances.

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The state and federal governments and health insurance companies are harnessing lessons from a still-emerging academic field of behavioral economics to nudge clients and customers into spending more money.

“Behavioral economics was developed by incorporating ideas from psychology into standard economic theories,” said Cait Lamberton, a professor of marketing at the University of Pennsylvania’s Wharton School. “If you see a deal that is available for only a short amount of time [like Medicare open enrollment periods], and thus pay more than you usually would, standard economics would say you’ve made an irrational decision. Behavioral economics says that no, what your brain is doing is responding to scarcity.”

These seemingly irrational choices are called “biases,” many of which can affect how we shop. For example, “loss aversion” makes us hypersensitive to losing money and more likely to buy something like whole life insurance for children.

The “decoy effect” makes us more likely to choose between two sub-optimal options when a third, even worse option is presented. For example, Medicare Part D providers may offer a decoy like an high costs, which may make the cheaper Medicare Part C with more [so-called] benefits look more appealing.

Most companies are well aware of these tendencies and how they drive our decisions. So to save money customers, patients and clients need to understand how the purchasing and shopping experience has been engineered to exploit our biases.

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