6 minute read
Financial advisors spend their careers learning about markets, products, and financial planning.
But the hardest variable to manage – ironically - isn’t yield or volatility.
It’s behavior.
See, more often than not, clients don’t fail because of math. They fail because of their emotions.
Meaning - they panic when they should be patient. They chase returns when they should rebalance. And they “feel” the market will crash right before it ends up rallying.
That’s why understanding behavioral bias isn’t just a soft skill – but an important one.
It’s the difference between guiding clients through volatility or watching them derail their own plans.
Thus, even though there are hundreds of these pesky biases, emotions, and behavioral flaws1, here are 10 behavioral biases every financial advisor should know about - and how to coach through them.
1. Loss Aversion
What it is: People feel the pain of losses roughly 2.5x as powerfully as the joy equivalent gains.
Example: A client who loses 5% in a quarter feels worse than they felt good after gaining >15% last year.
Why it matters: Fear of loss drives emotional selling - or worse, paralysis. And clients may hold onto bad investments just to avoid “locking in” a loss.
Takeaway: Normalize losses. Use visuals to show that volatility is part of growth. Remind them that temporary declines aren’t losses unless you sell, and to not fall victim to loss aversion.
- For more on this, I wrote about loss aversion in, “Why Investors Hate Losing: Prospect Theory, Loss Aversion & Market Behavior”
2. Recency Bias
What it is: The assumption that what’s happening now will continue forever.
Example: After a strong bull market, clients insist “this time is different.” After a correction, they swear “the market’s broken.”
Why it matters: It makes clients buy high and sell low - the exact opposite of the plan.
Takeaway: Expand the timeline. Show historical cycles, rolling returns, and context. Remind clients that short-term trends are just chapters - not the whole book.
3. Overconfidence Bias
What it is: The belief that we’re smarter, luckier, or better informed than we actually are.
Example: A client reads two articles on AI stocks and suddenly wants to “go all in.”
Why it matters: Overconfident investors underestimate risk and overestimate control (especially long-term). It’s dangerous in bull markets - and disastrous in bear markets.
Takeaway: Try using data, probability modeling, or historical evidence to illustrate downside risk. Confidence is healthy - but in markets, believing in certainty is hazardous.
4. Herd Behavior
What it is: Following the crowd because everyone else seems to know something.
Example: In 2021, clients piled into crypto or digital assets because “everyone’s doing it.” Then in 2022, the same crowd ran for the exits.
Why it matters: Herding amplifies bubbles and panics. By the time a client feels “safe” investing, the crowd has already priced in the move.
Takeaway: History is littered with crowd following - from the dot-com bubble to “meme” stocks to housing. It’s important to realize that crowds are often right at the start but rarely at the end.
5. Anchoring
What it is: Fixating on one number - a specific stock price, portfolio value, or technical chart level - and refusing to let go.
Example: A client won’t sell a stock they bought at $100 even though it’s now $70 and fundamentally weaker (yet still believes $100 is “fair value”).
Why it matters: Anchoring distorts judgment because people can get emotionally tied to arbitrary numbers instead of the current reality.
Takeaway: Change the reference point. Try asking, “If you didn’t already own it, would you buy it today?” That question breaks the anchor and reintroduces logic (if they say yes, then maybe framing it that they can now buy more at a lower price).
6. Confirmation Bias
What it is: Seeking information that supports existing beliefs while ignoring evidence that challenges them.
Example: A client who believes inflation will stay high reads only bearish headlines and ignores positive economic data.
Why it matters: It reinforces bad decisions - and builds emotional conviction in the wrong direction.
Takeaway: Present both sides of every story. When you show clients that you consider conflicting evidence, you don’t just educate them - you earn their trust.
7. Hindsight Bias
What it is: Believing, after the fact, that an outcome was predictable all along.
Example: “I knew the market would rebound - I just didn’t act fast enough.”
Why it matters: Clients forget how uncertain things felt in real time. Hindsight breeds false confidence and unrealistic expectations for the future.
Takeaway: Keep records of decisions and reasoning. When clients see what they really thought at the time, they respect process over prediction.
8. Mental Accounting
What it is: Treating money differently depending on where it came from or how it’s labeled.
Example: A client risks their “bonus money” in a speculative trade but guards their “retirement money” like treasure - even though it’s all part of the same plan.
Why it matters: It fragments financial thinking. Clients compartmentalize instead of seeing the full portfolio picture.
Takeaway: Consolidate purpose. Frame every dollar around goals - not sources. “Every dollar has a job” turns mental accounting into intentional planning.
9. Authority Bias
What it is: Placing too much trust in perceived “experts” (or the loudest voices with confidence).
Example: A client changes allocation after hearing a well-known TV pundit warn about a crash.
Why it matters: Authority bias blurs the line between information and influence since many may mistake charisma for credibility. We tend to view experts highly, even though we forget that at the end of the day, they’re people to - riddled with the same flaws we all carry.
Takeaway: Don’t compete with pundits - contextualize them. Explain that most “experts” speak in generalities. You speak to their specific situation. Authority fades when personalization begins (also, many experts are wrong all the time).
10. Status Quo Bias
What it is: Preferring to do nothing because change can feel less risky.
Example: A client resists rebalancing a portfolio that’s now 80% equities after a long bull run - because “it’s kept working.”
Why it matters: Inaction can be as dangerous as overreaction. When markets turn, comfort quickly becomes exposure.
Takeaway: Reframe such thinking as a potential risk. Ask, “What happens if we stay here for five years?” Note that doing nothing is still a decision - and it can sometimes cost more than action.
The Advisor’s Advantage: Turning Bias Into Trust
Every client walks into a meeting with biases already formed - built from experience, media, upbringing, and emotions.
Thus, the best advisors don’t fight them. But rather they translate them.
- When a client wants to sell in fear, you don’t lecture them on long-term returns - you walk them through how their brain is reacting to loss aversion.
- When they want to chase momentum, you remind them what recency bias does to portfolios.
- When they quote a famous pundit, you nod - then explain why your job isn’t to predict markets, it’s to protect outcomes.
Behavioral coaching is what separates good advisors from great ones. Markets reward patience, but clients reward understanding.
When clients feel understood, they stay calm. When they stay calm, they stay happy. And when they stay happy, they value you.
So don’t forget, the real work of an advisor isn’t just managing wealth - it’s managing human nature.
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Disclosures:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.