Every day you’ll take mental shortcuts, known as “heuristics”, to help you solve problems quickly. This can be incredibly useful in some circumstances and help you avoid becoming overwhelmed by decisions. Yet, when you’re making large decisions, including how to handle your finances, it could be harmful.

Heuristics are necessary for people to navigate their day. Indeed, according to a report in Harvard Business Review, the average adult makes more than 30,000 decisions every day, from what you’ll eat to what you’ll say.

Gerald Zaltman, a Harvard Business School professor, suggests that 95% of our cognition occurs in the subconscious mind. He adds this is necessary – your brain would short-circuit if it had to weigh up each decision one by one.

So, mental shortcuts are essential for functioning. However, this “autopilot mode” could lead to bias and decisions that aren’t right for you. Recognising which decisions would benefit from more careful analysis could help you seek out opportunities and identify potential risks you might have overlooked if you took a mental shortcut.

4 mental shortcuts that may affect your financial decisions

1. Anchoring effect
Anchoring effect is a cognitive bias where your view and decisions are fixed on a particular piece of information.

For example, the old retail favourite of using “was £100, now £60”. You might fixate on the original price of the item and convince yourself that you’re getting a bargain because you’ve anchored your view.

It’s a bias that could lead to you overspending or, in other circumstances, failing to adjust your view as circumstances change.

Anchoring can be difficult to avoid, but taking time to review new information and the reliability of sources could help identify where it may affect your decisions.

2. Herd mentality
Herd mentality can affect many areas of your life, not just your financial decisions.

The instinct that there’s safety in numbers could lead to you following the crowd even if it’s not the right option for you. You may simply believe that a large group of people can’t all be wrong, or that others have carried out research, so you can rely on their decision-making skills.

However, herd mentality overlooks the fact that a decision that may be right for one person isn’t necessarily the right option for another.

If you hear a couple of friends saying that they’ve thrown caution to the wind and booked a luxury holiday that they can’t really afford, you might feel tempted to do the same. Yet, perhaps their definition of not being able to afford it, or their attitude to debt, is different to yours.

Assessing financial opportunities with your circumstances in mind could help you avoid following the crowd.

3. Confirmation bias
Confirmation bias refers to the tendency to favour information that supports your beliefs and ignore the data that refutes them.

Confirmation bias can be a challenge when you’re making financial decisions because it might mean you bypass key pieces of information simply because it doesn’t support your preconceived notions. So, it could mean steps to carry out research aren’t as valuable as you might expect.

Not letting your views cloud how you view information can be challenging. Yet, taking a step back to weigh up the value of the information objectively could help you make better financial decisions.

4. Familiarity bias
You might gain some comfort from sticking to what you know. However, familiarity bias could mean you miss out on opportunities.

For example, perhaps you keep your savings in an account you’ve had since childhood and you don’t look around for a better savings interest rate.

Working with a financial coach could help you step out of your comfort zone and seize opportunities that are right for you that you may not have even considered before.

Working with a financial coach could help you view your finances from a different perspective 

Looking at your finances from a different perspective could help you identify where heuristics could be affecting your decision-making skills. A tailored plan could help you set out a path that’s right for you, based on your goals and circumstances, and may help you reduce the effect of bias.

Drop me a line if you’re ready to get started.