Published on Jan 30, 2026 • Updated on Oct 13, 2026
This article was written by Adem Tumerkan
Content Editor, Dunham | 2025 ThinkAdvisor Luminaries Award Winner | 2026 Wealthies Finalist, Thought Leader of the Year | Macroeconomics, markets, geopolitics & global trends
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Financial advisors spend their careers learning about markets, products, and financial planning.
But the hardest variable to manage – ironically - isn’t yield or volatility.
It’s behavior.
See, more often than not, clients don’t fail because of math. They fail because of their emotions.
Meaning - they panic when they should be patient. They chase returns when they should rebalance. And they “feel” the market will crash right before it ends up rallying.
That’s why understanding behavioral bias isn’t just a soft skill – but an important one.
It’s the difference between guiding clients through volatility or watching them derail their own plans.
Thus, even though there are hundreds of these pesky biases, emotions, and behavioral flaws1, here are 10 behavioral biases every financial advisor should know about - and how to coach through them.
| Behavioral Bias | What a Client Might Say | Advisor Coaching Response |
|---|---|---|
| Loss aversion | “I can’t bear to see another decline.” | Review liquidity needs, risk capacity, and whether the portfolio still fits the plan. |
| Recency bias | “This fund keeps winning. Why own anything else?” | Compare recent results with longer periods and different market conditions. |
| Overconfidence | “I know this company will outperform.” | Test the downside case and discuss position limits. |
| Herd behavior | “Everyone I know is buying it.” | Evaluate the investment independently of its popularity. |
| Anchoring | “I’ll sell when it gets back to what I paid.” | Assess its current prospects, portfolio role, taxes, and alternatives. |
| Confirmation bias | “Every article I read supports my view.” | Ask what evidence would challenge or change that view. |
| Hindsight bias | “That market move was obvious.” | Revisit what was known when the original decision was made. |
| Mental accounting | “It’s bonus money, so I can take more risk.” | Evaluate the decision within the household’s overall financial plan. |
| Authority bias | “A famous strategist says we should sell.” | Examine the evidence and its relevance to this client’s circumstances. |
| Status quo bias | “Let’s leave it alone—it has worked so far.” | Compare keeping the allocation with changing it, including costs and risks. |
What it is: Loss aversion is the tendency for losses to weigh more heavily than comparable gains in decisions.
Example: A client reacts more strongly to a $10,000 portfolio decline than to a comparable $10,000 gain.
Why it matters: Fear of loss drives emotional selling - or worse, paralysis. And clients may hold onto bad investments just to avoid “locking in” a loss.
Takeaway: Normalize losses. Use visuals to show that volatility is part of growth. Remind them that temporary declines aren’t losses unless you sell, and not to fall victim to loss aversion (albeit prices aren't gauranteed to recover).
What it is: Giving recent events more weight than they deserve when assessing risks or forming expectations.
Example: After a strong bull market, clients insist “this time is different.” After a correction, they swear “the market’s broken.”
Why it matters: Recent performance can dominate decisions and encourage return chasing or abandoning a strategy after a decline.
Takeaway: Expand the timeline. Show historical cycles, rolling returns, and context. Remind clients that short-term trends are just chapters - not the whole book.
What it is: The belief that we’re smarter, luckier, or better informed than we actually are.
Example: A client reads two articles on AI stocks and suddenly wants to “go all in.”
Why it matters: Overconfident investors underestimate risk and overestimate control (especially long-term). It’s dangerous in bull markets - and disastrous in bear markets.
Takeaway: Try using data, probability modeling, or historical evidence to illustrate downside risk. Confidence is healthy - but in markets, believing in certainty is hazardous.
What it is: Following the crowd because everyone else seems to know something.
Example: In 2021, clients piled into crypto or digital assets because “everyone’s doing it.” Then in 2022, the same crowd ran for the exits.
Why it matters: Herding amplifies bubbles and panics. By the time a client feels “safe” investing, the crowd has already priced in the move.
Takeaway: History is littered with crowd following - from the dot-com bubble to “meme” stocks to housing. It’s important to realize that crowds are often right at the start but rarely at the end.
What it is: Fixating on one number - a specific stock price, portfolio value, or technical chart level - and refusing to let go.
Example: A client won’t sell a stock they bought at $100 even though it’s now $70 and fundamentally weaker (yet still believes $100 is “fair value”).
Why it matters: Anchoring distorts judgment because people can get emotionally tied to arbitrary numbers instead of the current reality.
Takeaway: Change the reference point. Try asking, “If you didn’t already own it, would you buy it today?” That question breaks the anchor and reintroduces logic (if they say yes, then maybe framing it that they can now buy more at a lower price).
What it is: Seeking information that supports existing beliefs while ignoring evidence that challenges them.
Example: A client who believes inflation will stay high reads only bearish headlines and ignores positive economic data.
Why it matters: It reinforces bad decisions - and builds emotional conviction in the wrong direction.
Takeaway: Present both sides of every story. When you show clients that you consider conflicting evidence, you don’t just educate them - you earn their trust.
What it is: Believing, after the fact, that an outcome was predictable all along.
Example: “I knew the market would rebound - I just didn’t act fast enough.”
Why it matters: Clients forget how uncertain things felt in real time. Hindsight breeds false confidence and unrealistic expectations for the future.
Takeaway: Keep records of decisions and reasoning. When clients see what they really thought at the time, they respect process over prediction.
What it is: Treating money differently depending on where it came from or how it’s labeled.
Example: A client risks their “bonus money” in a speculative trade but guards their “retirement money” like treasure - even though it’s all part of the same plan.
Why it matters: It fragments financial thinking. Clients compartmentalize instead of seeing the full portfolio picture.
Takeaway: Preserve useful goal-based categories, but evaluate their combined effect on household risk, liquidity, and spending. Money’s source should not be the sole reason for taking more risk
What it is: Placing too much trust in perceived “experts” (or the loudest voices with confidence).
Example: A client changes allocation after hearing a well-known TV pundit warn about a crash.
Why it matters: Authority bias blurs the line between information and influence since many may mistake charisma for credibility. We tend to view experts highly, even though we forget that at the end of the day, they’re people to - riddled with the same flaws we all carry.
Takeaway: Don’t compete with pundits - contextualize them. Explain that most “experts” speak in generalities. You speak to their specific situation. Authority fades when personalization begins (also, many experts are wrong all the time).
What it is: Preferring to do nothing because change can feel less risky.
Example: A client resists rebalancing a portfolio that’s now 80% equities after a long bull run - because “it’s kept working.”
Why it matters: Inaction can be as dangerous as overreaction. When markets turn, comfort quickly becomes exposure.
Takeaway: Reframe such thinking as a potential risk. Ask, “What happens if we stay here for five years?” Note that doing nothing is still a decision - and it can sometimes cost more than action.
Before acting on a client’s request, clarify what changed: their circumstances, the investment facts, or their reaction to recent events. Ask which evidence supports the decision and what evidence might challenge it.
Then compare the proposed action with the written plan, including liquidity needs, diversification, taxes, and costs. Document the decision and agree on when to revisit it. Advisors should apply the same discipline to their own recommendations.
So don’t forget, the real work of an advisor isn’t just managing wealth - it’s managing human nature.
What are behavioral biases in investing? Behavioral biases are recurring patterns in judgment that can affect how investors interpret information and make decisions. They may influence how much risk someone sees in an investment, how confident they feel about a forecast, or how they react to gains and losses.
What is the difference between loss aversion and the disposition effect? Loss aversion describes how people weigh losses relative to gains of a similar size. The disposition effect describes a tendency to sell winning investments while holding losing ones. The two are related, but they aren't the same. One concerns how losses feel, while the other describes a pattern in investment decisions.
How can financial advisors address behavioral biases? Advisors can use written decision criteria, balanced evidence, decision records, and reviews of the whole portfolio. These tools give clients a clear way to assess a choice beyond a single investment's gain or loss. Before addressing a possible bias, advisors should check whether the client's financial circumstances have changed.
Does a client's request to change investments always reflect a behavioral bias? No. A request to change investments may reflect a genuine change in the client's financial circumstances rather than a behavioral bias. Advisors should first understand what's behind the request. They can then review the decision using the client's circumstances, written criteria, balanced evidence, and the portfolio as a whole.
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.
