Why we often make irrational financial choices and how to gain insight and clarity

Have you ever frozen up when faced with too many options? Or found yourself holding onto a decision—like an investment, subscription, or job—simply because you'd already put time or money into it?

This article is intended to shed light on common financial biases, helping you approach money decisions with greater clarity and intention.

What is behavioral bias?

A behavioral bias is a mental shortcut or pattern that causes us to make decisions that aren’t always logical or even in our best interest. These biases are often shaped by our emotions, past experiences, and the way our brain tries to simplify complex situations. Instead of carefully weighing all the facts, we might make quick judgements based on fear, habit, or what feels familiar.

We can also think of behavioral biases as emotional adaptations—protective patterns shaped by life experiences, trauma, attachment dynamics, and cultural messages.

Bias shows up in many forms: cognitive, emotional, individual, or collective. Cognitive biases tend to be easier to address because they stem from errors in thinking or logic. We can often correct them through reflection and new information. Emotional biases, on the other hand, are rooted in feelings. They’re deeper and less responsive to reason.

This concept is central to the field of behavioral economics, originally explored by Kahneman & Tversky in their 1979 paper on Prospect Theory.

With that foundation in mind, let’s examine a few specific biases that often drive money-related decisions and financial stress.

Confirmation Bias – Seeking out or interpreting information in a way that confirms what we already believe.

Example: Believing you're “bad with money” and only noticing financial mistakes, you avoid learning new strategies because you assume they won’t work for you.

Behavioral Blueprint: Shame, early criticism, and parent modeling of financial incompetence.

Optimism Bias – The tendency to believe that we are less likely than others to experience negative outcomes. This often leads us to underestimate risks or overestimate positive outcomes, a phenomenon also referred to as comparative or unrealistic optimism.

Example: Taking on an expense now with the unrealistic expectation that money will be more available later.

Behavioral Blueprint:  Dissociative coping mechanism, magical thinking tied to survival strategies, overcompensation for past scarcity or helplessness.

Loss Aversion Bias – Loss feels more painful than the joy of gaining something of equal or greater value

Example: Staying in a job that no longer supports your well-being because leaving feels like giving up the time, effort, or identity you've invested. Even when the situation is draining or harmful, the fear of losing what you've already poured in can keep you stuck.

Behavioral Blueprint: Scarcity mindset, need for safety and control, trauma.

Value Affirmation Bias – We make decisions that confirm our existing sense of identity or values, even at the expense of logic.

Example: Refusing financial help because “I’m too independent” or overspending to appear generous.

Behavioral blueprint: Self-concept, identity roles, pride, internalized family values.

Choice Paralysis Bias – Becoming overwhelmed by too many options, which leads to inaction or decision avoidance.

Example: Not choosing a retirement plan or a health plan because there are too many to compare.

Behavioral blueprint: Fear of regret, perfectionism, internalized shame about “choosing wrong.”

Sunk Cost Bias – Continuing with something because of what we’ve already invested, not because it still benefits us.

 Example: Staying in an expensive program you no longer want just because you paid for it. Or continuing to fix a car that keeps breaking down, simply because you've already spent so much on past repairs.

Behavioral Blueprint: Guilt, fear, failure, shame avoidance. Sunk cost bias often reflects difficulty with loss, regret, or change, especially if past investments feel tied to identity, effort, or proving something.

Endowment Bias – Placing a higher value on something we already own than we would if we didn’t own it. In other words, once we possess something emotionally, physically, or financially, we tend to overestimate its worth simply because it's ours.

Example: You hold onto clothes, furniture, or gadgets—not because they’re useful, but because you already own them and it feels wasteful to let them go. You list something far above market value on Ebay or Facebook Marketplace, expecting others to see its worth the same way you do.

Behavioral Blueprint: Identity preservation, security needs, and sentimentality. Endowment bias often reflects a need for stability, predictability, and a fear of scarcity and regret.

How These Biases Impact Your Financial and Emotional Well-Being

When left unexamined, behavioral biases quietly shape our financial habits, reinforce limiting beliefs, and create patterns of avoidance or overextension. They may cause us to hold onto harmful investments, avoid necessary financial decisions, or over-identify with roles that no longer serve our growth.

Over time, these patterns can lead to:

- Sabotaged financial goals through overspending, chronic indecision, or fear-based saving and avoidance

 - Strained relationships due to identity-driven decisions, guilt around money, or unspoken financial expectations

 - Diminished well-being as stress, shame, and internal conflict grow from misaligned values and unresolved emotional drivers

Recognizing these patterns is not about blame. It is about gaining clarity. When we bring awareness to the cognitive and emotional drivers behind our financial choices, we create the opportunity to respond with intention rather than reaction. When we understand the emotional logic behind our money decisions, we can choose differently.

If you're ready to explore these patterns in an environment where your financial behaviors are unpacked with honesty and care, therapy can help you untangle the emotional drivers behind your money habits. Reach out to learn more about how we can work together.

Reflection Prompts

- What early experiences shaped my beliefs about money, value, or success?

 - Which of these biases feels most familiar or active in my current financial behavior?

 - When do I feel most emotionally reactive or avoidant around money decisions?

 - What am I holding onto financially or emotionally that no longer aligns with my current values or goals?

- If I could rewrite one money habit or belief with more emotional honesty and intention, what would it be?

Sources and Further Reading

- Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263–291. Available on JSTOR: https://www.jstor.org/stable/1914185