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If you have ever held on too long to a losing investment, or bought a hot stock at what proved to be exactly the wrong time, or inadvertently kept paying recurring charges for an app or subscription you no longer use, you’ve been tripped up by what behavioral economists call cognitive biases.
Plain English translation: Our brains are wired in ways that sometimes cause us to take actions that aren’t good for our financial health.
In doing so, you are in good company — Nobel Prize–winning company, in fact.
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That would be Daniel Kahneman, the late pioneer of behavioral economics and author of the best-selling book Thinking, Fast and Slow, who received the award in 2002 for his groundbreaking work on human judgment and decision-making, integrating psychological research into economic science.
“You can study investor bias for a lifetime, and it doesn’t make you immune to it,” says Andy Reed, head of behavioral economics research for $10 trillion asset manager Vanguard.
“People used to ask Kahneman, ‘Does studying this stuff make you a better investor?’ He would say, ‘No! I still make mistakes. I just know I’m making them!’ ”
As Kahneman’s comments make clear, our behavioral tendencies are so deeply entrenched — because of our experiences, our emotions, our ancient caveman history of desperately trying to survive to the next day — that they can be challenging to eradicate, even for the world’s foremost experts on the subject.
But it pays — quite literally — to try. That’s because these unconscious biases — an ingrained aversion to losses, the innate pull to follow a crowd, a tendency to stick with what’s familiar, overconfidence about your skills and many more — can otherwise seriously impede your best efforts to build wealth and ensure your money lasts your lifetime.
Awareness is the first step. Then, once you understand the cognitive quirks that can undermine you, you can take specific, targeted action to counteract them.
“Knowledge is power,” says Katy Milkman, a professor at the University of Pennsylvania’s Wharton School, author of the book How to Change, and host of the podcast Choiceology. “The best thing you can do is to recognize these behaviors, set up processes that are bias-proof, and get second opinions that are independent. That will lead to better decisions.”
What does research reveal about the psychological forces that can secretly sabotage building wealth? Here is a look at seven of the biggest ones, along with strategies to keep them in check or, better yet, turn them to your financial advantage.
1. Overcome your investing overconfidence
Here’s a simple question: Do you think you can beat the market? It’s theoretically possible, but it’s extremely tough in real life. Even the pros can’t do it consistently, with the vast majority of actively managed stock and bond funds typically lagging the market over periods of a few years or more.
Yet the lure of better-than-average gains is hard to resist — and many people believe they’re just the investor to do it.
A survey by Natixis Investment Managers last year, for example, found that 62% of U.S. individual investors would not be content with market returns but were instead looking to outperform market benchmarks.
And they trust their acumen: According to a Finra Foundation study, nearly two-thirds of investors rate their investment knowledge highly, even though survey respondents, on average, got more than half of the answers wrong on a 10-question basic investment quiz.
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Behavioral economists call this phenomenon overconfidence. “Basically, you think you know more than you do and are a better investor than you actually are,” says Terrance Odean, a finance professor at the University of California–Berkeley’s Haas School of Business.
As a result, Odean says, “You are likely to trade too much, because the ones who are more confident are more likely to take action, even though that confidence is not warranted.”
Being out of stocks for the 10 best days of the 5,000 or so trading days in a 20-year period would chop your gains by more than half.
It can be a very expensive tendency. One classic study, coauthored by Odean, of more than 66,000 investing households and millions of transactions over many years found that the most active traders, powered by overconfidence, lagged the market by 6.5 percentage points every year. Compound that underperformance over decades, and you’re essentially lighting your portfolio on fire.
The same holds true of trying to time the market, thinking you are experienced enough to sell at the right moment to avoid big losses and jump back in when prices rise again. But history shows that gains and losses typically come in short, unpredictable spurts; blink and you miss them.
Being out of stocks for the 10 best days of the 5,000 or so trading days in a 20-year period would chop your gains by more than half, a J.P. Morgan Asset Management analysis found. Miss a month’s worth and you’d barely break even.
Your best moves. Advisers recommend that you don’t try to time the market, but rather make regular, fixed contributions to your investment accounts. Then, as long as the fundamentals haven’t changed, stick with your picks for the long haul. And, as boring as it may sound to some investors, make index funds that track the broader market the foundation of your portfolio, rather than trying to identify individual winners.
If you do want to pick stocks and trade actively, Odean suggests limiting this activity to, say, no more than 10% of your overall portfolio. “Acknowledge that the reason you are trading is that you enjoy doing so, and then segregate that money,” he says. “To limit the possible damage you can do, spend time asking yourself why you might be wrong.”
Also helpful in countering unconscious overconfidence: Give yourself a time delay before moving forward with a transaction to confirm your thinking. Or seek a second opinion, such as consulting a trusted family member or financial adviser. That holds true for any major purchase or financial decision as well as your investments.
As Omar Aguilar, CEO and chief investment officer of Schwab Asset Management, noted in a video about overconfidence on the company website, “While we often over-estimate our own abilities, we tend to be more objective when considering the decisions of others.”
2. Look beyond the recent past
Can you remember what happened yesterday or last week? Hopefully. Can you remember what happened 10 or 20 years ago? Probably not so much.
Our tendency to overweight the relevance of events that are fresh in our memory and base financial decisions on that information is a phenomenon behavioral economists call recency bias. “We tend to estimate probabilities based on ease of recall,” says Milkman. “If something just happened, it’s much easier to remember, so we overestimate the likelihood it will happen again.”
Consider, for example, how the current multiyear bull market has affected investors’ expectations of future returns. According to the Natixis survey, U.S. investors believe stocks will deliver gains of 12.6% a year above inflation from now on. The actual historical return of stocks since 1957, adjusted for inflation: 6.7% a year on average.
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The danger of overly high return expectations is that they may lead to undersaving in the years before retirement or overspending once you stop working and begin withdrawing money from your portfolio, writes Amy Arnott, a portfolio strategist at Morningstar, in an article on the company’s website.
Arnott notes that someone who hopes to amass $1 million for retirement in 30 years would aim to save $250 a month if they assumed they’d earn 12.6% annually on their investments. But if that saver used a more realistic return of 7.3%, they’d know they’d need to sock away at least $770 a month — or risk falling way short of their goal.
Your best moves. Always use long-term returns in your planning, not recent performance. For the S&P 500 index of large companies, the annual average gain since 1957 is 10.56% (not adjusted for inflation); for bonds, it’s about 5%.
Think in terms of economic cycles as well. Bull markets, on average, generate returns of 115% and last 2.7 years, while bear markets typically drop 35% and last less than a year, according to Ned Davis Research. The current bull run is close to the mark on typical gains and has blasted through the average length.
That suggests now might be a good time to dampen some of the risk in your portfolio, particularly if you’re near retirement or in the early part of it, when a bad year or two can have more-serious consequences for how long your money will last. If you haven’t rebalanced in a while — that is, sold some winning investments and shifted the proceeds to pockets of your portfolio that have underperformed — now is a good time to do so.
And if you have a heavy concentration of tech stocks among your holdings, you might want to shift some money to other areas, such as healthcare and consumer staples.
Also, if you’re within the five years before or after retirement, aim to keep enough savings in cash to cover two to three years’ worth of expenses. That way, if a downturn hits, you won’t be forced to sell investments at a loss, leaving you with fewer assets to recover when the market bounces back. For more advice, see “How to De-Risk Your Portfolio.”
3. Be ready to cut your losses
No one likes to lose. If you’ve ever suffered a big loss on a stock or gotten killed at the blackjack table in Las Vegas, you remember how painful the feeling was.
It’s extremely difficult to see your hard-earned money walk out the door, and it’s something people try hard to avoid— a propensity known as loss aversion. Indeed, research shows the psychological pain of losing is about twice as powerful as the pleasure of gaining an equivalent amount.
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“We suffer more from downside than we ever enjoy upside,” says Dan Ariely, a professor of psychology and behavioral economics at Duke University and author of the book Predictably Irrational: The Hidden Forces That Shape Our Decisions.
The understandable distaste for losing can sometimes lead to a reluctance to sell assets that have dropped in value — even if the prospects for recovery are dim. Vanguard has noted, for instance, that selling activity is significantly lower among investors who have unrealized losses compared with those whose returns are flat or who are sitting on unrealized gains.
But holding on to a loser that’s likely to stay down or, worse, slide further because you’re so emotionally invested in it isn’t the best idea. Experts have a name for this, too: sunk cost fallacy or, more simply put, the tendency to throw good money after bad.
We suffer more from downside than we ever enjoy upside. – Dan Ariely
On the flip side, the aversion to losses can also lead some savers to put too much money in conservative vehicles, such as savings accounts or certificates of deposit. True, you won’t lose money in nominal terms.
But you are almost certainly not going to reach your retirement savings goals if you limit yourself to ultra-safe, low-growth investments that typically don’t (or barely) beat inflation.
Your best moves. Decide whether to sell or hold an investment based on objective information, focusing on how the investment is likely to fare in the future rather than how much money you’ve already put into it. Seek out research from outlets such as Morningstar, Value Line or your financial services provider, and ask yourself this key question: If you didn’t already own this investment, would you buy it today?
If your reasoned conclusion is that you would not, it’s probably advisable to sell and live to fight another day.
A little preventive financial medicine in the form of broad diversification among different kinds of assets — stocks and fixed-income securities, domestic and international holdings, big and small companies across a variety of industries — can also help you avoid the pain of future losses by minimizing the impact of any single investment.
“Diversification is underappreciated,” says Ariely. “You still get upside, but much less downside.”
If an aversion to losses has led you to favor low-risk, low-growth cash investments for your long-term savings, consider how this exposes you to a different kind of loss: loss of purchasing power due to inflation. At a recent 2.4% rate, inflation will cut your purchasing power in half over the course of a typical 25- to 30-year retirement. To avoid that fate, you need a good amount of your savings in stocks, the only investment that historically has outpaced inflation over the long term.
4. Venture farther from home
There’s a famous adage from Berkshire Hathaway legend Warren Buffett: Invest in what you understand. One manifestation of that for U.S. investors is that they’re naturally inclined to favor U.S. stocks because there’s a level of familiarity that makes those investments more comfortable, compared with, say, some little-known Chinese company halfway around the world.
A Morningstar analysis found that Americans have 81% of the equity portion of their investments in U.S. stocks — way out of whack in relation to the global landscape, where the U.S. represents less than half of the world’s market value.
“Home-country bias is huge,” says certified financial planner Ryan Salah of Capital Financial Partners in Towson, Md.
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Until recently, that hasn’t been a huge handicap, with the U.S. stock market doing better than international equities in nine of the past 11 calendar years through 2024.
But the rest of the world staged a powerful comeback in 2025, with non-U.S. stocks returning 30% for the year, outpacing the S&P 500 by double digits, according to Fidelity.
This year is looking promising for foreign stocks as well. Investment bank Goldman Sachs expects European stocks to gain 13% in 2026 and Asia Pacific stocks to gain 12%, both outpacing the S&P 500.
That’s not a statement on the stocks alone, but also on currency valuation. The U.S. dollar is now at multiyear lows, pushing up the comparative value of foreign-denominated funds.
Bottom line: If you are mostly invested in the U.S., you’re probably leaving significant money on the table.
Your best moves. The easiest way to increase your global allocation is to invest via an international index fund—essentially one-stop shopping for foreign exposure. iShares Core MSCI Total International Stock ETF (IXUS), for instance, charges a mere 0.07% in fees and has delivered a whopping return of 37.71% over the past year. Another standout: Vanguard Total International Stock (VXUS), up 38.46% over the same period. Both include stocks in emerging markets as well as stocks in developed countries.
How much of your stocks should be in foreign shares? Morningstar uses a 70% U.S., 30% non-U.S. split for its equity allocation, says senior portfolio manager Ricky Williamson. Not only will this let you benefit from rising markets around the world, he says, but it will also give you a currency hedge for some protection against a falling dollar.
5. Redirect your focal point
Imagine a stock you’ve been eyeing has been trading at about $80 a share. Then it drops to, say, $60, and you spy a bargain.
Is it, though? Is there any evidence that shows the stock’s intrinsic value is now $60? Or does it only feel as if the shares are on sale because that initial $80 figure is stuck in your head?
That’s called anchoring. Research shows that the first information you receive — whether it’s about an investment, a retail purchase, the price of a home or a salary offer — is usually the most powerful. The initial data point becomes the number all other numbers are judged against, even if that weight is not justified.
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Take real estate, for example. If a home is on the market for $1 million, the seller is putting that anchor in your head, and negotiations subsequently revolve around that amount, even if comparable houses are selling for less.
Anchoring is also the reason why in salary negotiations, the standard advice is to avoid mentioning a figure first. If you tell a prospective employer you’re looking for $80,000 a year, that becomes the anchor, even if the company might have gone to $120,000.
“If I tell you, this fund has generated 7% annual returns, that becomes the expectation of how it will perform in the future,” says Milkman. “Or if you are trying to buy a rug at a market, maybe you are thinking of paying $300. But if they ask $3,000, and you bargain them down to $2,000, you think you got a great deal.
The anchor pulled you up.” A related phenomenon is called first-impression bias — the tendency for our early or initial experiences to color how we view subsequent opportunities and challenges. Depression-era babies, for instance, famously stayed frugal for the rest of their lives.
“Our research has found that investors who started in the bull market of the ’90s allocate more to equities decades later, compared to those who got started during the dot-com crash just a couple of years later,” says Vanguard’s Reed.
“In theory, since they are close in age, those investors should have roughly the same asset allocation. But people stay grounded in the stock-market conditions from when they first got started.”
Your best moves. To counter the influence of anchoring, seek out independent assessments of value. Rather than comparing share prices to what they were yesterday, for example, check out Morningstar’s “Fair Value” estimate for the companies it researches, which can serve as a good starting point for determining what a stock is worth.
Salary-comparison sites such as Indeed, Glassdoor and Salary.com provide compensation averages for different roles in different fields. If you’re in the market to buy or sell a home, Zillow’s Zestimate of a home’s market value is typically accurate within a couple of percentage points for listed houses.
“Make it an exercise applying a math process that doesn’t involve your own judgment,” says Milkman. “Average multiple outside opinions to start making better decisions.”
In general, experts say, try to be more mindful of the possible influences on your financial choices. “Ask yourself why you are making a decision and whether you have a blind spot,” says Reed. “Take more time to reflect, and ask yourself if you are doing something for the right reason or whether it’s just a knee-jerk reaction.”
6. Harness inertia for good
Humans are creatures of habit. Generally speaking, we tend to stick with what we are already doing, mostly because it’s easier than changing direction.
“Inertia appears to be an even more powerful force when it comes to managing money than greed or fear,” says Christine Benz, director of personal finance and retirement planning for Morningstar and author of How to Retire. “People are busy and often paralyzed by indecision, so left to their own devices, they do as little as possible.”
Participation and contribution rates for 401(k) accounts provide a perfect example of how inertia impacts financial decisions. In plans where enrollment is voluntary, 64% of eligible employees contributed to their 401(k) in 2024, according to the latest data from Vanguard.
In plans where employees were instead enrolled by default, the participation rate shot up to 94%. Employees defaulted into their 401(k) save more, too: 12.1% of their salary, on average, compared with 7.6% for those in plans where enrollment was voluntary.
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Inertia can hurt wealth-building in other ways, too. For example, it might lead you to stick with your current health coverage or homeowners insurance rather than shop for better deals. Or consider how you might rack up unnecessary charges if you automate payments for purchases such as subscriptions and streaming services.
Three-fourths of the respondents in a survey by C + R Research said it was easy to forget about these recurring charges once they signed up, and 42% were still paying for services they no longer used. That’s probably why the people polled estimated their monthly charges to be $86 when, in fact, they were paying an average of $219 a month.
Your best moves. Put the power of inertia to work in your favor by automating good financial practices, when possible. You can sign up with your financial services provider, for example, to have regular contributions to accounts earmarked for specific savings goals, such as building an emergency fund or funding a home renovation project, automatically deducted from your checking account.
Many employers allow you to split your paycheck to be directly deposited in different accounts as well. If your employer is among the many that include an auto-escalation feature in their 401(k) plan, you can also sign up to have contributions to your account automatically raised, typically by a percentage point, once a year to turbocharge retirement savings.
In short, transform a potential weakness into a potential strength. Says Benz: “I would urge investors to lean into their inertia by making smart, ‘good enough’ choices to start (target-date funds are a great example), putting their contributions on autopilot (including to their IRAs and taxable accounts), and only making adjustments if they get a raise or something major happens in their lives.”
7. Jump off the bandwagon
Look at the history of investing, and you’ll see a long series of bubbles, marked by an extraordinary run-up in prices followed by a dramatic collapse. There’s always a latest craze, from the Dutch tulip mania of the 1630s to the dot-com boom and bust of the 1990s to the current fervor surrounding cryptocurrency, prediction markets and artificial intelligence stocks — whatever investors collectively deem is the Next Big Thing.
It’s classic herd mentality, in which people make decisions based on group behavior rather than independent thinking and analysis. Social media has a catchy name for it too: FOMO, or fear of missing out. Science confirms that the bandwagon effect is real.
A study by researchers at the University of Leeds found that when just 5% of people in a crowd seem to know where they’re going, the other 95% will follow without realizing they are copying the informed group. Sticking with the herd certainly made a lot of sense for earlier humans, who were roaming the savannahs with lots of predators around.
Remaining with the herd meant survival. But in modern times, this emotional response to what others are doing can cause you to buy too high, sell in a panic and otherwise diverge from a disciplined long-term strategy.
The recent trajectory of bitcoin serves as a cautionary example. Investors piled into the cryptocurrency after the election of Donald Trump to a second term, driving its price from about $69,000 in November 2024 to as high as $126,000 last July. But anyone who bought into it at or near that peak has since had a nauseating ride down the roller coaster, with bitcoin plummeting 45% to a recent trading range of $66,000 to $67,000.
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Your best moves. A simple way to counter herd mentality is to regularly rebalance your portfolio, says Ariely. “People don’t rebalance enough,” he says. “Let’s say you have a portfolio target of 50% stocks and 50% bonds, and then stocks go up, so now they have risen to 60% of your holdings. If you rebalance now, you are essentially forcing yourself to sell high and buy low — which is exactly what you should be doing.”
Set allocation targets for your portfolio, based on your life stage and risk tolerance, and then don’t stray too far from those targets. A once-a-year rebalancing is optimal for most investors, according to Vanguard.
Or you might set triggers if a particular allocation strays well outside of predetermined bands — say, if the stock portion of your portfolio moves 5% above or below the initial target. Portfolios that are rebalanced in that way outperform those that aren’t, according to a study by money manager T. Rowe Price.
Bringing your own judgment to bear, as always, is critical, too. “If you want to be a better investor, don’t just buy something everyone else is talking about,” says Odean. “Spend time researching where other people aren’t spending time.”
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
