5 Cognitive Biases in Behavioral Finance and Entrepreneurship

Silhouette of person's head made out of gears, which are slowly moving away/toward head. Depiction of cognitive biases in behavioral finance, etc.

If you’re a financial advisor, you are also likely an entrepreneur on some level. Entrepreneurs are innovators, problem solvers, and highly motivated business people: these are just a few of the characteristics that make an entrepreneur stand out. Often, entrepreneurs are driven to stay at the cutting edge of their industry, through reading or listening to books and podcasts, or by attending summits and events. Yet in this pursuit of knowledge and growth, we can often get in our own way. That is, the cognitive biases in behavioral finance or the financial services industry, or any entrepreneurial pursuit, can frequently stand in the way of our personal growth. 

You see, our brains are composed of billions of neurons and trillions of synaptic connections. The brain is a super-powered processor. And yet, we still cannot process every single thought and data point that we perceive with our senses. In order to better process the data we collect, our brain creates literal cognitive biases that help us to create meaning. 

The unfortunate downside of these biases, called heuristics, is that they can lead us to dismiss new and important information or even draw incorrect or harmful conclusions. They can also prevent us from maintaining a Prosperity Mindset or growing in our knowledge. 

Why should you care? Because staying stagnant in your beliefs and understanding can prevent you from growing in your business. Let’s unpack what some of these harmful biases may be, and how you can expand your mind. 

Common Cognitive Biases in Behavioral Finance

There are many “types” of cognitive biases. While they can save us a lot of time and mental energy, it’s probably in your best interest to push back when you can. This keeps your critical thinking skills sharp! 

An infographic showing the critical thinking process. Critical thinking process involves identifying cognitive biases.

1. Negative Bias

Humans have a tendency, as a whole, to place more importance mentally on negative news and input. So much so, that it can be really subtle in your own mind. After all, our instincts have primed us to identify and avoid situations that could be harmful to us. It only makes sense to place a subconscious emphasis on the “negative.” 

Yet, from a Prosperity standpoint, placing too much emphasis on the negative can actually keep us stuck in the mud. It’s hard to save money when you’re too focused on your financial fears. Similarly, it can be difficult to make savvy business decisions when you’re hyper-focused on the negatives. 

For example, if you’re worried that your business isn’t making enough money, or you’re not pulling in enough clients, the best course of action is to do something different. Maybe you have the awareness to identify that you’re not confident enough in your pitch or your strategy. Some solutions would be to attend a webinar, watch some training, or get in touch with another advisor who could help you with case design. Yet these things have a time and money commitment, and if you’re concerned about your income, it’s hard to commit. 

Yet nothing changes if you change nothing. You must pull yourself out of the Scarcity mindset that a Negative Bias creates, and commit to doing something. Otherwise, you stay stuck.

2. Familiarity Bias 

You can probably guess what a familiarity bias is. In short, it’s our brain's tendency to latch on to information when it comes from a familiar source. This could be someone you know, someone who looks and dresses like you, or even someone in the same industry as you. This is your brain’s way of telling you who to trust with new information. 

People are fallible. While trust is an important factor, don’t let it keep you from asking questions, getting to the truth, and learning. In the financial industry especially, language is tricky, and sometimes even people within the industry can throw around verbiage that isn’t completely accurate. The phrase “tax-free,” for example, is used liberally, and often incorrectly. 

Trust is important in our peer-to-peer relationships, especially when you’re building a community. Yet part of that trust involves honesty and integrity. We should be able to question or even correct each other respectfully, to find the truth. 

3. Self-Serving Bias

This one can be a hard pill to swallow. The Self-Serving Bias refers to our human tendency to take credit for success, and avoid responsibility for failure. If you’re giving a speech or hosting a webinar, of course, you’re likely to credit your hard work when the event is a success. Yet if that same event doesn’t go well, or isn’t well-received, it’s often easier to blame outside factors.

These things may even be true. Bad luck may just be the source of your “misfortune.” Yet you have to bypass your brain’s shortcut and really ask the question: “Is there something I could have done differently to get a different result?” Only then can you grow from the experience. 

Maybe your PowerPoint had too much text, or the way you carried yourself lacked energy. These are things you can work on and improve. If it truly was just a streak of bad luck, at least you know! Just don’t let your ego get in the way of your trajectory. 

4. Anchoring Bias

This is the human tendency to latch on to the first piece of information you hear. And boy do we see evidence of this in the financial industry. How common is it for people to believe in “buy term and invest the rest” or “just run all your expenses through life insurance.” These phrases may be a client’s first introduction to life insurance and then serve as their anchoring point through which they filter all other information.

It can be critical in your interactions with clients to understand that they have certain informational “anchors.” And one of the best things you can do when presented with this information is to validate them. Don’t rebuke, negate, or argue with the client. Just acknowledge that you hear them. Then you can let your work speak for itself. This helps the client from feeling like they must defend their beliefs and position and keeps you from looking like the bad guy.

Additionally, it’s good to examine where you might be influenced by your own Anchoring Bias. Are you hanging your whole understanding of a concept on your introduction to the topic? It may be that you began with the truth. However, you won’t know until you engage your critical thinking skills and unpack what you know. This can be a great growth exercise as you expand your understanding of the financial industry.

5. Confirmation Bias

The final cognitive bias in this list is Confirmation Bias—the human tendency to readily accept information that confirms what you already believe. To spin it another way, Confirmation Bias is the willingness to blindly accept that which confirms your belief and ignore that which negates it. The danger here is that this can prevent us from seeing the truth. And sometimes the truth is not what we want to believe. 

For example, you don’t give yourself room to grow and develop if you only surround yourself with an audience who sings your praises. It may feel good for a while, yet isn’t it more valuable to surround yourself with discerning people who can push you or your business where it needs to go?

In one of Peter Diamandis’ newsletters, which inspired this article, he shares a nugget of wisdom that Elon Musk shared with him. Elon said, “My friends tell me how great all my products are, but my BEST friends are the ones who give me the most brutal criticism.”

As an entrepreneur, your ability to hear all feedback and data, and then analyze it at face value, is tantamount to your growth. Don’t let your fear of being wrong prevent you from your limitless potential. 

Challenge Yourself to Think Outside the Bias

Cognitive biases exist for a reason. They help the human brain process and make sense of the world, hopefully, helping us to retain energy. That energy, however, is ours to control and spend as we wish. And learning to master your thought and control how you process information (as well as WHEN to do so), can put you leaps and bounds ahead of the game.

Cognitive biases are not something to be ashamed of—it’s a human experience that we all share. They’re simply something we must learn to navigate so that we don’t stagnate or become proponents of misinformation. Growth does not occur by staying comfortable. Some of the best opportunities for growth arise out of uncomfortable moments. The entrepreneur that can harness that discomfort into progress can do incredible things. 

On your journey, one of the best things you can do is keep learning and challenging your preconceived notions of the world. A commitment to lifelong learning, growth, and boundary-pushing can help you in this endeavor. If we can be a part of that journey, we’d love to support you. Our 3-day, in-person Truth Training is designed to teach you how to use the Truth Concepts suite, while maintaining the integrity of the financial industry.

One Response

  1. Itís nearly impossible to find educated people about this subject, however, you seem like you know what youíre talking about! Thanks

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