Read time: 4.0 minutes
Your brain is backstabbing you.
We make about 35,000 decisions every day which is EXHAUSTING.
So our brain is always trying to reduce its workload.
Enter cognitive biases: sneaky mental shortcuts our brain unconsciously takes that lead us to make terrible financial choices.
Today, I’ll share 5 cognitive biases that hurt your finances, and how you can protect yourself from… well, yourself.
5 ways your brain is sabotaging you
1. Hyperbolic Discounting
Hyperbolic Discounting is when you prefer a smaller reward now over a larger reward later.
Picture this: You get a $5,000 end-of-year bonus and say: “This year I’ll start investing!”
But then… the new iPhone drops, your laptop is getting “slow,” and you notice your old couch is just too… old.
So you spend all $5,000.
But… if you had invested your bonus every year, assuming a 10% annualized average return, you’d have over $92,000 dollars in 5 years.
More than enough for 7 new iPhone, 12 new laptops, and 5 new couches.
The next time you’re tempted to spend, do the math and ask yourself:
What am I giving up in the long-term by spending this money now?
2. Loss Aversion
Loss aversion is when losing something hurts more than the happiness of gaining something of equal or greater value.
This might be why your money’s stuck in a regular savings account or under your couch. The fear of potential loss keeps you from investing, even though, historically, it’s one of the best and fastest ways to build wealth.
The best way to overcome this? Ease into it.
That’s why I’m thinking of hosting a free live training session on how to build a financial freedom investment strategy from scratch (even if you have ZERO experience).
What do you want me to cover? Let me know here.
3. Negativity Bias
Negativity Bias is when you give more weight to negative outcomes than to positive ones.
Have you ever had 1 bad thing ruin the rest of your day? For example, 7 people said your presentation about “Why Pineapple Belongs on Pizza” is great but 1 person said, “Your math on slide 15 is wrong.”
…Aaand that 1 comment has you rethinking your entire existence.
The best way to hype yourself up again is to do the 3:1 rule:
Every time you hear, feel, or think something negative, force yourself to come up with 3 positive things.
4. Optimism Bias
Optimism Bias is believing bad things won’t happen to you.
It’s easy to fall into this when you’re in your 20’s and feel invincible. But 57% of people under 27 don’t have enough money to cover 3 months of expenses.
All it takes is 1 medical bill, 1 flat fire, or 1 bad thing happening for you to spiral into financial ruin.
My recommendation is to keep at least a 6 month emergency fund at all times. It’s the best way to have peace of mind over your finances.
And the best place to keep it is in A High-Yield Savings Account (HYSA).
Some of my favorite HYSAs are offering the highest interest rates available today, 4%+. This means if you keep $10,000 in a HYSA, you’d earn $400+ by the end of the year.
If you’re interested, here are some of my favorite HYSAs.
5. Sunk Cost Fallacy
The Sunk Cost Fallacy is when you stick with something just because you’ve put time, money, or effort into it—even if it’s not worth it anymore.
Like staying at a job you hate because you’ve been there for years.
But every second you stay in a bad situation is a second you’re missing out on a better one.
If you left that job, you could find another that pays more, and actually makes you happy.
Ask yourself: “If I were starting fresh today, would I still choose this?”
If the answer is no, it’s time to say bye.
What’s your downfall?
Take 13 seconds to think which of these 5 cognitive biases you resonate the most with.
Once you have an idea…
Hit reply and tell me your cognitive bias story
I read every email and will get back to you!
To making smarter money moves,
— Vincent Chan
New Youtube video
In this video I share the 9 signs you’re going to be rich. After 8 years in finance, I’ve gotten pretty good at spotting the habits and behaviors that lead to wealth. These 9 are like the secret sauce so learning how to apply them to your life will be really helpful.
My favorite things this week
Returning to the gym: That first workout after a long break feels sooo good. Once you get used to exercising you feel super weird and stiff without it. I took a break because I was traveling and had a lot going on, but now I’m back and ready to crush it!
The last 5PM sunset: I hate it when the sun sets early — like I’m not ready to go to bed yet so why is the sun giving up so early? The good thing is that this is the last early sunsets in NYC!
PS: I want to hear from you! Want to see more (or less) of this content? Let me know your feedback here
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