Why Financial Plans Fail: The Behavioural Risks
When you think about financial planning, you might picture complex strategies, superannuation, insurance, and investments. But there’s one critical component often overlooked by many financial advisers: your behaviour.
Research shows that investor behaviour, not market performance, is one of the biggest determinants of financial success. Yet, many advisers focus solely on numbers and strategies without addressing the behavioural biases that can derail even the most robust financial plans.
At Thriving Wealth, we take a unique approach focused on creating the highest probability of our clients living a fulfilled and financially free life on their terms. This involves specialising in risk management and prioritising behavioural coaching alongside financial advice, ensuring your financial plan doesn’t just stay on paper but comes to fruition.
The Hidden Risks of Behavioural Biases
Your financial decisions are influenced by more than just logic — they’re shaped by deep-seated biases and emotions. Often, we are our own worst enemy when it comes to wealth creation because of the emotional connection we have to our money.
It’s normal to feel this way, but these emotions can quietly sabotage your financial goals, often without you even realising it.
Let’s explore six common behavioural biases and their impact on your financial journey:
1. Overconfidence Bias
What is it?
Overconfidence bias happens when you overestimate your ability to predict or outperform the market. This may be as a result of a few previous investment successes, leading you to feel invincible to loss or overly confident in your ability to predict or outperform the market.
It’s risk:
Overconfidence can create a false sense of security, leading to taking on too much risk, excessive trading, ignoring diversification, and overlooking potential pitfalls.
2. Confirmation Bias
What is it?
Confirmation occurs when you focus solely on information that supports your existing beliefs while ignoring contradictory evidence.
Social media algorithms can worsen this by pushing similar videos or content signed with your viewpoint, making them feel like absolute truths,
It’s risk:
Confirmation bias can narrow your perspective and cloud your judgment. You risk making choices based on incomplete or biased information, which can result in missed opportunities for growth or diversification. Over time, these mistakes can compound, de-railing your financial progress.
3. Loss Aversion
What is it?
Loss aversion is the tendency to fear losing money more than you value gaining it. Losing $1 feels more painful than the joy of earning $1. This emotional reaction can make you overly cautious or prone to panic when markets dip.
It’s risk:
Loss aversion often leads to overly conservative strategies, such as keeping too much money in cash, which limits growth potential. It can also cause emotional reactions, like selling investments during market downturns, locking in losses, and missing out on eventual recoveries.
4. Herding Behaviours
What is it?
Herding occurs when you follow the crowd, assuming others know something you don’t. This can happen during market bubbles or downturns, with friends, family, and social media creating buzz or FOMO (fear of missing out) around certain investments.
When everyone is talking about a "hot stock" or urging you to act quickly, it’s easy to get swept up, even if it doesn’t align with your financial goals.
It’s risk:
Herding often results in poor timing — buying high during a bubble or selling low during a crash. It disconnects you from making decisions based on your financial goals and risk tolerance, leading to emotional decisions driven by fear or greed rather than logic.
5. Short-Term Bias
What is it?
Short-term bias is the tendency to prioritise immediate rewards over long-term outcomes. For example, you might abandon a long-term investment strategy to chase a quick profit or struggle to stick to a disciplined savings plan because it doesn’t offer immediate gratification.
It’s risk:
This mindset can derail your financial progress by encouraging impulsive decisions and neglecting the bigger picture. Chasing short-term rewards instead of focusing on long-term goals can lead to missed opportunities and unnecessary risks. It’s one of the biggest obstacles to building sustainable wealth and staying on track with your financial plan.
6. Anchoring
What is it?
Anchoring occurs when you rely too heavily on an initial reference point, like the original price of an asset, to make decisions—even when new information suggests it’s time for a change.
For example, refusing to sell a stock because you’re waiting for it to reach the price you originally paid. This bias causes us to rely heavily on the first piece of information we receive and interpret newer information from that reference point, rather than seeing it objectively.
It’s risk:
Anchoring can trap you in underperforming investments or cause you to miss better opportunities. It prevents you from adapting to new information and adjusting your strategy, which is essential for successful financial planning. By holding onto outdated reference points, you risk making decisions that don’t align with your evolving financial goals.
Overcoming Behavioural Biases:
Breaking free from these biases is not easy, but it’s crucial for ensuring you can bring your financial plan to fruition.
Acknowledging and understanding how emotions can influence your financial decisions is the first step. It’s only human to feel attached to your money or be swayed by the latest investment hype. But if you continue to let these emotions guide you choices, you’re setting yourself up for costly mistakes that can derail your long-term goals.
The key to overcoming these biases is building awareness. Every time you make a financial decision, pause and ask yourself: Am I being guided by fear of loss, a desire for quick gains, or the pressure of what others are doing?
Working with a financial adviser can make all the difference in cutting through the noise. An adviser who specialises in behavioural coaching doesn’t just provide you with numbers — they are there to guide you providing an objective perspective when emotions cloud your judgement. With expert guidance, you can start making decisions based on your long-term financial goals, not in reaction to the next market trend or barbecue advice,
Remember, financial success isn’t about chasing quick wins or following the crowd—it’s about staying the course, even when it feels uncomfortable. By overcoming these biases, you take back control over your financial journey and create a future that’s not dictated by emotional decisions but by well-thought-out strategies that stand the test of time.
About the Author
John Cachia is a seasoned financial adviser and dedicated parent of three boys. With a passion for financial literacy and wealth management, John has been in the industry since the young age of 14. His early start in finance has provided him with a wealth of experience and insight, which he now uses to guide families towards achieving their financial goals. As Australia's leading wealth adviser for young families, John is committed to helping parents become positive financial role models for their children, ensuring a secure and prosperous future for the next generation.