This article was published on: 12/3/25
Bias can affect the decisions you make, including financial ones. But how are biases formed? Research suggests numerous factors influence biases, including the following six.
1. Evolutionary psychology
Some forms of bias go back millennia and allowed early humans to prioritise safety. The ability to make quick decisions could have been the difference between survival and extinction.
This survival instinct may have helped early humans, but it’s often at odds with making rational decisions today. One example is the endowment effect – a cognitive bias where people place a higher value on an item they already own.
A research article from Vanderbilt Law School (15 September 2025) suggests that the endowment effect is not only present in humans but in non-human primates. The bias had a greater effect on primates when food, rather than toys, was involved, which would have greater implications for survival. The author suggested that evolutionary theory might predict such biases.
2. Your personal experiences
The experiences you have will shape how you approach information and the decisions you need to make.
Experiencing financial stress during your childhood could mean you’re more likely to be risk-averse because you subconsciously worry about financial security. Alternatively, if your first foray into investing is successful, this could lead to overconfidence and taking more risk than is appropriate.
It can be difficult to predict how experiences will lead to biases. Two people could experience similar events but respond very differently to them. However, examining your approach to managing your finances could reveal the ongoing influence of certain experiences.
3. Mental shortcuts
To save energy, your brain also makes mental shortcuts, known as heuristics.
These shortcuts help you make decisions quickly, and they can also distort your judgment. For example, when making a financial decision, you might be affected by anchoring. This is where you focus on an initial value or reference point.
In the context of investing, this may mean you anchor a particular share’s value to the price it had when you first saw it. Even when new information becomes available, this anchor affects how you view the potential opportunity.
4. Emotions
Your emotional state can strongly influence how you feel about your finances and options.
For example, if you read about an investment opportunity in the newspaper, excitement and the fear of missing out could lead you to invest before you’ve fully weighed your options. As strong emotions are often short-term, acting on emotional impulses could lead to regret in the future.
5. Social influences
It can feel safer to be part of a crowd. If it seems like everyone else is investing in a particular asset or sector, it can be tempting to follow along. You might feel like all those people can’t be wrong, and you’d be missing out if you don’t follow suit.
As your goals and circumstances can vary significantly from others, including family and friends, following the crowd could lead to decisions that aren’t right for you.
Market bubbles demonstrate the effect social influences can have.
In the late 1990s, eager to invest in the internet, investors drove technology stocks to record highs. Indeed, the US technology-focused index, the Nasdaq, went from under 1,000 points in 1995 to more than 5,000 in 2000, according to Investopedia (10 August 2025).
The market suffered a dramatic correction in the early 2000s as it became clear shares were overvalued – it took 15 years for the Nasdaq to surpass the high recorded during the dot-com bubble.
6. Information framing
How information is presented to you can affect how you view it.
Imagine you’re looking at three different fund options for your pension. One is in the centre with bold text in a coloured box to draw your attention. The other two are on plain white backgrounds. Even though the attention-grabbing fund might not be right for you, the way it’s framed could mean you choose it.
Being aware of framing and its effects could be incredibly useful next time you’re making financial decisions.
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Working with a financial planner could help you identify when bias might be affecting your financial decisions. Contact us to discuss your financial plan and what you want to achieve.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up, and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
