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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COGNITIVE BIAS: Envy and Jealousy

Posted on December 28, 2024 by Dr. David Edward Marcinko MBA MEd CMP™

By Staff Reporters

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Envy / Jealousy: This bias also relates to the contrast and social proof biases.  Prudent financial and business planning and related decision-making are based on real needs followed by desires.  People’s happiness and satisfaction is often based more on one’s position relative to perceived peers rather than an ability to meet absolute needs. 

The strong desire to “keep up with the Jones” can lead people to risk what they have and need for what they want.  These actions can have a disastrous impact on important long-term financial goals. 

According to colleague Dan Ariely PhD, clear communication and vivid examples of risks is often needed to keep people focused on important financial goals rather than spurious ones, or simply money alone, for its own sake.

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CONTRAST EFFECT: Cognitive Bias

Posted on November 24, 2024 by Dr. David Edward Marcinko MBA MEd CMP™

FOR FINANCIAL ADVISORS

By Dr. David Edward Marcinko MBA MEd CMP™

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Sensation, emotion and cognition work by Contrast Effect [cognitive bias]. 

Now, such perception is not only on an absolute scale, it also functions relative to prior stimuli.  This is why room temperature water feels hot when experienced after being exposed to the cold.  It is also why the cessation of negative emotions “feels” so good. 

Cognitive bias functioning also works on this principle.  So one’s ability to analyze information and draw conclusions is very much related to the context with in which the analysis takes place, and to what information was originally available.  This is why it is so important to manage one’s own expectations as well as those of a financial advisor’s or stock broker’s clients. 

For example, a client is much more likely to be satisfied with a 10% portfolio return if they were expecting 7% than if they were hoping for 15%.

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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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On Cognitive Biases

Posted on February 23, 2019 by Dr. David Edward Marcinko MBA MEd CMP™

Every Single Cognitive Bias in One Infographic

[Courtesy of: Visual Capitalist]

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The human brain is capable of incredible things, but it’s also extremely flawed at times.

Science has shown that we tend to make all sorts of mental mistakes, called “cognitive biases”, that can affect both our thinking and actions. These biases can lead to us extrapolating information from the wrong sources, seeking to confirm existing beliefs, or failing to remember events the way they actually happened!

To be sure, this is all part of being human – but such cognitive biases can also have a profound effect on our endeavors, investments, and life in general. For this reason, today’s infographic from DesignHacks.co is particularly handy. It shows and groups each of the 188 known confirmation biases in existence.

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[Click on image to adjust size]

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MORE: https://www.visualcapitalist.com/every-single-cognitive-bias/

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