We’ve all seen this.
A client sits down in the evening and checks their phone. They open their pension investment app. The screen shows a small dip. Nothing major. Just a tiny red line heading south.
The client overreacts. Suddenly, they worry about having to work longer. They fret about their pension. They panic about whether they should move everything into cash.
All from one quick glance at a screen, which has nothing to do with asset allocation.
This is pure human psychology.
This is behavioural finance in action. The part of financial planning that AI will never replace, because markets behave one way but people behave another.
Every client brings their own filters to a meeting. Their memories. Their fears. Their past experiences. Snippets from the news. Stuff someone said in the pub. All of this colours what they hear and how they react.
In this article, I want to walk you through nine of the big behavioural biases that show up in real conversations with real clients. Not academic theory. Not textbook definitions. Just practical insight you can use tomorrow.
Every client brings their own filters to a meeting. Their memories. Their fears. Their past experiences
I will share stories from my trainings, coaching, talks, everyday life, and the odd trip to Cheltenham Races. And then we will talk about how you can coach clients through each bias without sounding preachy or clever.
Overconfidence
You know that driver survey from the States where 93% of people said they were above average behind the wheel. That cannot be true. Yet almost everyone believes they are better than everyone else on the road.
Investing is the same. Overconfidence is the gap between someone’s actual skill and their belief about their skill.
On paper, it looks like this. Investors overestimate their knowledge and ability. That leads them to take more risks. Trade more often. Concentrate money in a handful of supposedly clever ideas. And over time, their returns are usually worse than the boring diversified investor who just sticks to the plan.
Think of fund managers who become celebrities. The Woodford story is the classic. Years of strong performance. Massive inflows. Then the aura builds. The media love it. He starts to believe in his own special gift for stock picking. Familiarity bias creeps in as well. He favours what he knows and what has worked before. Checks and balances erode. Overconfidence does the rest.
Clients are not immune either. The DIY investor who made money on one tech stock in the pandemic now believes they have an edge. The business owner who has always run a successful firm assumes that skill transfers directly to trading foreign exchange on an app.
You see overconfidence in advisers too. I see it in training rooms. We believe we are immune to these problems because we live in the world of finance. Yet we are as human as anyone.
How can you help clients with this one.
First, normalise it. I often say something like this.
We all tend to think we know a bit more than we do. Me included. The danger in investing is that this makes us trade too often or take risks we do not need. My job is to give you the benefit of all the data and research so we do not fall into that trap.
Second, use simple evidence. For example, show clients the research that says the most active traders usually underperform because of costs and timing errors. Not in a nerdy way. Just a simple visual. The more you trade, the more you pay and the more you tend to lose.
Third, build process. Rebalancing schedules. Written investment policies. Agreed rules for when you will and will not make changes. Process is the antidote to overconfidence.
Herding
Herding is just following the crowd and assuming the crowd must know something you do not.
It shows up when you hear phrases like everyone is talking about this or all my friends at work are doing that or my son has put everything into this new thing.
We saw herding in the dot-com bubble around 2000. If you had a company with dot com at the end of the name, you were suddenly a genius, and the market loved you. Many of those businesses had no real model. It was pure story. Herding took prices higher and higher until gravity did its work.
We are probably seeing a version of it now with artificial intelligence. I joke that every business is AI powered because they have thought about AI. Huge flows into a small handful of tech stocks. Everyone assuming it can only go one way.
The oil industry has the same rhythm. Shelly and I were watching Land Man. It shows beautifully how waves of optimism and fear sweep through the sector based on the price of a barrel of oil. When the herd is optimistic, drilling goes mad. When the herd panics, everything shuts down.
Bitcoin is another case study. Young investors armed with apps and TikTok clips telling them this is the future of money. They see mates making quick gains. They see BBC headlines announcing new price highs. They feel like the last person to the party. So they pile in, not because they understand it, but because everyone else seems to be doing it.
How can you help clients here?
One phrase I like is this little line.
Be careful when you follow the masses. Sometimes the M is silent.
It gets a smile and makes the point.
Then ask questions that cut through the herd story.
- If nobody around you was talking about this, would you still be interested?
- If this idea never made the news, would it still make sense in your plan?
Bring them back to their own goals and their own reality. Remind them that a diversified portfolio means they will always know someone who did better and someone who did worse. That is how it is supposed to be.
Loss aversion
Loss aversion is the big one for me. Losing hurts roughly twice as much as winning feels good.
Back to the coin toss.
Heads you win one hundred pounds. Tails you give me fifty.
Mathematically you should snatch my hand off. Over a lifetime of these bets you would be ahead. Emotionally, your brain screams at the thought of losing fifty, even though the upside is bigger.
Olympic medal winners show this in a lovely way. Silver medallists are often less happy than bronze medallists. Silver is focused on the gold they almost had. Bronze is thinking thank goodness I did not come fourth. Same podium. Very different feelings.
Now tie this to modern investment apps. Clients can see their portfolio swing up and down day by day. That little red blip becomes a crisis in their head because their loss aversion has been triggered. The gain from last year has faded in their memory. The small temporary loss on screen is all they can see.
Loss aversion also explains why clients cling to poor investments. They do not want to crystallise the loss, so they hold on and hope. Or they sell winners too early to lock in a small gain, missing years of compounding because they are desperate not to let a profit slip away.
In NLP we talk about away from and towards motivation. Most humans are driven more by an urge to get away from pain than by a desire to move towards gain. That is loss aversion in action.
How do you coach it?
Set expectations on day one. Show clients a chart of a portfolio over twenty or thirty years. Point out the wobbles. Say something like this.
“At some point, this will go down. Not because anything is broken, but because markets breathe in and out. When that happens your brain will shout at you to do something. That is loss aversion. My job is to prepare you for that moment so we do not make short-term decisions that harm your long-term plan.”
Encourage clients not to check apps daily. Maybe suggest a monthly or even quarterly check. The less frequently they look, the more often they will see gains rather than random noise.
When markets do drop, remind them of the gains they have already made over the years. Bring back perspective. Loss aversion shrinks when people see the full picture, not just the latest blip.
Gambler’s fallacy
Gambler’s fallacy is the belief that random events have a memory.
Twenty heads in a row, so tails is now overdue. A slot machine that has not paid out in ages, so the next spin is bound to be a winner. A market that has risen for a while, so it must crash soon. Or the reverse, a market that has fallen, so it must bounce soon.
My friend Kev on the fruit machines was a walking example. He would feed coins in for ages. The more he lost, the more convinced he became that the machine owed him a win. He even got me to guard the machine while he went to the loo, in case someone else stole the jackpot he had earned.
Markets do not work that way. Prices move for reasons. Changes in earnings, interest rates, sentiment, and liquidity. Not because the universe thinks a stock is due for a good run to even things out.
We even talk this way in our own heads. I have caught myself saying this cannot keep going up. There must be a correction soon. And yes, sometimes that is grounded in valuation data and common sense. Other times, it is just the gambler’s fallacy with a tie on.
How do you address this with clients.
Use the coin toss story. It is a simple way to show that each flip is still fifty fifty no matter what came before.
Then bring it back to investing.
Rather than guessing when something is due to move, we look at the underlying businesses and the price we are paying. We base decisions on fundamentals, not on the idea that the market owes us a result.
If a client says surely this cannot fall any further or this cannot keep rising, ask them why. Often, they cannot give a reason beyond a feeling. Once they see that, you can gently move the conversation back to facts.
Familiarity
Familiarity bias is all about comfort. People prefer to invest in what they recognise. Local businesses. Their own employer. Brands they shop with. The UK market, rather than overseas. Because if they know it, it feels safer.
The problem is that familiarity is not the same as low risk. NatWest staff in the early 2000 felt great buying shares in their own bank. They saw the logo every day. They worked there. The price climbed into the £20 plus per share and they were happy.
Then the financial crisis hit. Their employer came under massive pressure. The share price collapsed. In one painful move, they lost both job security and capital value. Familiarity had concentrated their risk rather than reducing it.
We are seeing a version of this again with the government trying to steer pension money towards UK assets in the name of supporting British growth. There is a political and economic argument there, which I will leave aside. From a behavioural perspective, though, it feeds familiarity bias. People believe home assets are safer simply because they are nearby and on the news every night.
You see it in clients who say I like that company, we shop there. That is fine for a small personal holding alongside a diversified core. It is not fine as the foundation of a retirement plan.
How to coach clients.
A simple way is to show a world map of stock market capitalisation. Most investors are surprised by how small the UK slice is these days. It helps them see that they are one small part of a bigger picture.
You can also use their own life as an example. Ask them where their income, home and family are. Usually, all in one country. Then explain that their human capital is already heavily tilted to the UK. So it makes sense for their financial capital to be more global.
You are not telling them they are wrong. You are just broadening their view beyond what feels familiar.
Anchoring
Anchoring is the tendency to latch onto one number and base everything on it, even when that number has lost all relevance.
Share prices people once saw on a statement. A previous high watermark on an app. The price they paid for a house. The pension pot value before a correction.
Take NatWest again. Staff who bought at £20 plus are anchored to that price. Years later, when the shares were at £2 to £3, the anchor was still £20 in their head. Anything below that felt like a loss rather than a fresh decision point.
More recently, when talk of a new privatisation of NatWest was in the news, I was looking at the price in the mid-£2.50s and thinking it looked decent value. Then the story faded, the election came and went, and the price moved on again. My own anchor was still hanging around that earlier figure. Now they sit at £5.50 – I think that’s expensive!
Clients do this all the time. They buy a fund at 100. It falls to 90. They say they will not sell until it reaches 100. But the market does not care where they came in. The only relevant question is whether that fund is still the right home for their money today.
How to help.
When you notice anchoring language, I just want to get back to where I was, stop, and name it gently.
I hear you keep referring to that previous value. That number has become an anchor for you. It is perfectly human to do that. But the market does not know or care what that figure was. Shall we look instead at what is best for you from here?
Then zoom out. Show longer-term charts. Show income received along the way if relevant. The more context you provide, the less power that single anchor number has.
Confirmation bias
Confirmation bias is our tendency to look for evidence that proves we are right and ignore evidence that suggests we might not be.
I do it when I go to a restaurant. Shelley and I will book somewhere for Saturday. I have had the steak before and loved it. The waiter comes over and says the steak is excellent tonight. That is it. I am having the steak. My existing bias has just been confirmed by an authority figure with a nice apron.
Clients do the same with money. They think the state will provide. So they latch onto news items about the triple lock and ignore articles on long-term affordability. They think they are never ill. So they recall every winter they got away without a bug and forget the times they were off work. They think they have plenty of cover already, because a friend down the pub said so.
Finfluencers rely heavily on confirmation bias. They show the lavish lifestyle, the rented Lamborghini in Dubai, the quick wins, and the screenshots of big profits on contracts for difference. Young followers who already want to believe in easy money feel their belief is being backed up by real-world proof. They do not see the risk warnings, partly because the influencer hides them and partly because their own filter screens them out.
How do you deal with this gently?
Echo their language back as a question.
The state will provide, you say. Will provide? What makes you so confident of that?
I am never ill. Never?
I cannot afford cover. Cannot afford?
By emphasising the absolute word they used, you invite them to think again without directly arguing. Then you can introduce alternative evidence and help them see a fuller picture.
You can also use a third-party voice. The FCA research. Case studies from others. It feels less like you versus them and more like you and the client together looking at reality.
Recency bias
Recency bias is giving too much weight to what just happened and too little to everything else.
An investor sees Bitcoin rise sharply this year and concludes that Bitcoin is brilliant. Another sees a particular fund fall last quarter and decides it is terrible. Both are judging on a tiny slice of history.
There is a classic study on the New York Stock Exchange from the mid-1980s. Researchers selected the best- and worst-performing shares from a recent period. They then tracked them for the next three years. The so-called losers went on to outperform. The winners underperformed. In other words, the market had overreacted to recent good or bad news and then reverted once people calmed down.
The same happens with investment styles. One-year value is in fashion. The next year, its growth. Clients want to ditch whatever has just had a rough spell and pile into whatever has just done well. Which usually means buying high and selling low. All because the last 12 months loom larger in their memory than the last 20 years.
How to respond.
Return to the time horizon. If a client is investing for a retirement 20 years away, then last quarter is just weather. The climate is what matters.
You might say.
“We will always be able to find something that has just done brilliantly and something that has just had a bad patch. If we chase whatever looks good this year, we will always be one step behind. Our job together is to pick a strategy that makes sense for the next decade, not just the next headline.”
And show long-term data that includes crises and recoveries. Once clients see that every scary period in the past now looks like a bump on a rising road, recency bias loses some of its grip.
Mental accounting
Mental accounting is treating money differently depending on where it came from or what story we attach to it.
The classic example is the jam jar on the windowsill. Someone has a jar marked “holiday money” that earns nothing, while a credit card in the kitchen drawer racks up interest at 25%. Mathematically, it makes no sense. Emotionally, it feels right because the jar is linked to something nice.
People blow bonuses more freely than salaries. A random £500 win on the horses feels like fun money. A hard-earned £500 in savings feels like something to guard carefully. Yet both are identical in spending power.
Investors create mental pots. Safe money. Play money. Inheritance money. Future kids’ money. Nothing wrong with that as a planning tool as long as it is conscious and coherent. The problem comes when someone takes ridiculous risks with the so-called play money, which could still be life-changing if it goes wrong.
We see this at the Cheltenham Festival every year.
This will matter more and more as wealth moves from baby boomers to younger generations. A 28-year-old who suddenly inherits £200,000 may well treat it as Monopoly money, not as the bedrock of their future. Especially if they have grown up on a diet of finfluencers, betting apps and meme stocks.
How can we help?
First, name it.
You are treating this bonus differently because it feels like extra. I get that. But pound for pound, it is the same as your wages. The question is, what do you want this money to do for your future?
Second, show the compounding impact of sensible use. Taking a chunk of that inheritance and putting it into a long-term diversified plan can be literally life-changing. Clients often have no picture of that.
Third, help them organise their mental pots in a healthy way. Short-term fun. Medium-term plans. Long-term security. All conscious. All aligned.
Money is money. Once people see that, they can still enjoy some of it today without sabotaging their tomorrow.
Bringing it all together
So there we are. Nine very human quirks that play havoc with otherwise sensible financial decisions.
- Overconfidence
- Herding
- Loss aversion
- Gambler’s fallacy
- Familiarity
- Anchoring
- Confirmation bias
- Recency bias
- Mental accounting
You do not need to turn every client meeting into a psychology seminar. But a basic understanding of these forces changes the way you hear what clients say.
- I want to move everything into cash; you might now hear loss aversion plus recency bias.
- I am thinking about putting my pension into Bitcoin, you might hear herding, plus overconfidence, plus mental accounting.
- I am not sure I trust the UK market; you might hear a bit of familiarity bias with a dash of confirmation bias from recent headlines.
The practice of financial planning is increasingly being handled by technology. Algorithms can build frontier-efficient portfolios in milliseconds. Platforms can report performance in real time. AI can read fund reports while you sleep.
The human bit is what remains. The bit where you help a nervous person stay invested when every instinct is telling them to run. The bit where you gently challenge a belief that could cost them their future. The bit where you educate a client’s children about the power and danger of money they did not have to earn.
That, in my view, is the adviser of the future.
Less spreadsheet. More conversation. Less product. More coaching. Still grounded in solid technical knowledge, of course, but with a deep respect for the messy, wonderful human being on the other side of the desk.
And if we can master that combination. Sound investment theory plus practical behavioural insight. Then we give our clients the thing they really want.
Not just returns. But peace of mind.
