When I wrote The Lobster League, I wanted to give people a clearer way to understand something I’ve seen for more than 30 years as an advisor: smart, capable people still make irrational financial decisions. Not because they are careless, but because they’re human. That is really the heart of behavioral finance. We all bring mental shortcuts, emotional habits, personal history, and identity into our decisions. Sometimes those tendencies protect us. Other times, they quietly pull us away from what we actually want our money to do for us.
The biases in The Lobster League are not rare personality flaws, but rather they’re common patterns that show up in investing, spending, career choices, retirement planning, and even the stories we tell ourselves about success. The key to overcoming biases is to become aware of the moments when a bias directs your actions. Below are eight common cognitive biases I see again and again, along with examples of how they tend to show up in real life.
Overconfidence bias is the belief that competence in one area automatically translates to competence in another, or that our judgment has fewer limits than it really does. In finance, that can lead people to underestimate risk, skip due diligence, or assume they can handle complex decisions based on success in a completely different field.
An example of overconfidence bias from The Lobster League is the story of a man who succeeded in shipbuilding and thought his skills would translate to constructing condos, but he went into it without understanding the risks of real estate, and he ended up losing his investment. Another simple example is someone who is highly skilled at fixing computers deciding that means they can also repair a car with no preparation. A student might do something similar by assuming they don’t need to study because they have done well before. The danger is not confidence itself; it’s confidence that is disconnected from context.
I have experienced this in a humbling way through fishing. Someone can be very skilled at fly fishing on a stream and then step into bone fishing on the open ocean and realize that casting in 20-mile-per-hour winds is an entirely different challenge. You can see the fish. You have decades of experience. But suddenly, you are confronted with the reality that you did not know what you did not know.
That kind of overconfidence is mostly harmless when the stakes are low. Being bad at recreational fishing won’t have a major effect on your life. Taking the same mindset into a concentrated investment, a business venture, or a real estate deal absolutely can. That is why this bias matters so much in wealth management.
Caption: While bringing overconfidence to recreational fishing isn’t likely to have a major effect on your life, taking that same mindset to investments or business ventures certainly will.
Herding is the tendency to follow the crowd, especially when we assume other people know something we don’t. It creates a feeling of psychological safety. While comforting, it can also lead to poor timing and reactive decision-making.
A classic investing example is how hard it is for people to live out the phrase “buy low, sell high.” In practice, many people want to invest when everyone else is excited and pull back when fear is spreading. That is one reason markets can feel so emotional. An example from The Lobster League would be Ed and Susan Farmer, who sold off all their stocks during the March 2020 crash, only for the market to rebound quickly.
You can see herding outside the stock market, too. During the post-COVID housing boom, low rates helped light the fuse, but the behavior took on a momentum of its own as buyers rushed to compete with one another, often paying above asking price in cash. The reverse is also true: after the 2008 financial crisis, many people wanted nothing to do with real estate.
I have even felt a version of this in sports. I went to an Army-Navy football game simply for the experience, with no real rooting interest. But because I was sitting with West Point graduates, I found myself pulling for the Army. We like to think we are fully independent thinkers, but social environments shape us more than we realize.
Recency bias is the tendency to treat recent events as the most important or predictive information available. It causes people to overlook longer-term patterns and assume that what has happened lately will simply continue. Recency can be persuasive, but it is not the same thing as perspective.
This bias shows up constantly in investing. If a market has performed well recently, people start to believe it’s an obvious place to stay. If something has lagged, they often lose interest entirely, even when the broader valuation picture suggests an opportunity. The story of Natalie, the retired oboist who inherited her late husband’s stock portfolio, focused only on recent gains, ignoring the bigger picture until her wealth dwindled, can be found in my book.
That is part of why some U.S. investors have been slow to appreciate the role that international and emerging-market exposure can play in a diversified portfolio. In periods when U.S. assets dominate the conversation, it becomes difficult to make the case for looking elsewhere, even when other markets may offer more attractive valuations or diversification benefits.
This bias matters because long-term financial planning requires a wider lens. A good strategy cannot be built only on what happened last quarter, last year, or in the most recent headline cycle. It requires being able to zoom out to see overall patterns throughout time.
Caption: Short-term losses often lead to panic and impulsive sell-offs for investors, even when the bigger picture would tell them that keeping their money where it was would lead to long-term gains. Photo by kaboompics.
Loss aversion is the tendency to feel the pain of losses more strongly than the pleasure of gains. In practical terms, that means people often become excessively cautious, freeze when action is needed, or focus so much on avoiding short-term discomfort that they undermine long-term progress.
This bias is deeply human. Reaching far beyond finance, we are wired to seek pleasure and avoid pain. The challenge is that investing involves volatility by definition, and normal fluctuations can feel dangerous even when they’re part of a healthy, long-term process. Jane and Mark from The Lobster League are a classic example. A fiscally conservative couple, they’re unable to enjoy their wealth despite having amassed significant savings because of their fear of losing money.
I often think about younger investors here. Someone who is decades from retirement may have a tremendous opportunity to build wealth over time. Still, if they focus only on what feels bad in the present, they may miss the long-term benefits of continuing to invest through uncertain markets. The time horizon matters. The longer the horizon, the more resilient a thoughtful strategy can be.
Loss aversion also affects spending decisions. Some people accumulate substantial assets yet find it almost impossible to use those resources to support a meaningful, fulfilling life. When that happens, money stops being a tool and starts becoming a source of tension.
Status quo bias is a preference for keeping things the way they are, even when change may be healthier, wiser, or more aligned with current goals. Often, this bias is tied to identity. We don’t just resist changing a plan; we actively oppose it. We resist changing who we believe ourselves to be.
An example from The Lobster League is the story of Liz Stover. She faced an identity crisis after the things that she defined herself by, such as maintaining a successful stock portfolio and teaching piano, were lost to her due to declining asset performance and arthritis. When the outside things she designated herself by were gone, she was left trying to figure out who she really was.
I see this in people who keep operating at the same pace for 40 years and assume they should continue that way well into their 70s, even when work has consumed too much of their lives. While some people may still enjoy work and find it fulfilling in their twilight years, many do not. There is nothing wrong with hard work and dedication. The issue is failing to pause and ask whether your current choices still reflect your values, your season of life, and your definition of fulfillment.
Financial planning shouldn’t be static, because life isn’t. A strategy that made perfect sense when you were building wealth may need to evolve once your priorities shift toward stewardship, family, health, freedom, or legacy.
Caption: There’s nothing wrong with hard work, but it’s important to evaluate whether your current choices reflect your definition of fulfillment. Photo by Yan Krukau.
Confirmation bias is the tendency to seek, interpret, and remember information in ways that support what we already believe. Once we become attached to an idea, it becomes surprisingly easy to filter out evidence that challenges it. This bias is powerful because it often disguises itself as logic.
People don’t usually say, “I’m going to ignore evidence.” Instead, they gather only the evidence that helps them preserve an identity, justify a purchase, or defend a narrative about themselves. For instance, in my book, a heart surgeon who associates success with material possessions purchased a massive property called “the Breakers” and refused to sell it (even though it was a financial liability) because it represented his self-worth and identity.
I have seen this in people who spend years trying to keep up with the Joneses, only to eventually realize they were not pursuing what actually gratified them. They were pursuing what made them feel accomplished, admired, or secure in others' eyes, but at the cost of their own goals and dreams. Sometimes that realization comes after a major life event, like the loss of a loved one. Sometimes it arrives in a quieter moment when a person steps back and thinks, “What am I doing?”
This is one reason values-based planning matters. If you are clear about what you actually want your wealth to support, you are less likely to build a financial life around assumptions that were never really yours.
Negative narrative bias is the tendency to interpret information through a pessimistic lens and then use that lens to confirm a fearful worldview. It can make risk feel larger, danger feel more immediate, and security feel perpetually out of reach, even when the facts suggest otherwise.
Most people are naturally more sensitive to negative information than positive information. Add difficult personal experiences, such as growing up during economic hardship, living through a recession, living in poverty, or enduring major family trauma, and those fears can become deeply embedded in the way a person sees money.
The story of a judge demonstrates this bias in The Lobster League. A retired judge with a net worth of over $100 million experienced an overwhelming fear of destitution despite his immense wealth. His past life experiences, such as his wife’s battle with cancer, had made him fixate heavily on his fears of what could go wrong.
A degree of caution can be healthy. In many cases, it’s wise. But when fear becomes the dominant story, it can consume a person’s attention and keep them from making clear-eyed decisions. I’ve seen people with significant wealth remain haunted by worst-case scenarios because their internal narrative is stronger than the objective evidence before them.
That is where good advising can help. Rather than trying to dismiss someone’s fears and resignations, the goal is to separate emotional memory from present reality so financial choices are made with greater peace and clarity.
The endowment effect is our tendency to place a higher value on something simply because we own it, found it, or mentally classify it differently from other assets. In finance, this often overlaps with mental accounting, in which people treat one dollar differently from another depending on its source.
A common example is a cash windfall. People often spend inherited money, bonus money, or gambling winnings more freely than income they worked hard to earn, even though the dollars are functionally the same. The label changes their behavior. The successful accountants who consistently win 60k annually on trips to Vegas are an example from my book. Despite their wealth, they spend their winnings only on luxuries because they see it as “fun money” and hesitate to spend large amounts of their “earned money”, even when it comes to giving their son seed money for his startup.
You can see a related version of this when someone gets their first credit card and spends more than they should because it doesn’t feel like real money is leaving their hands. They have mentally classified it as something other than “real money”. But of course, money is money, regardless of whether it comes in the form of cash, salary, a bonus, or available credit.
This bias matters because it can distort both spending and investment decisions. When we assign emotional meaning to categories of money rather than evaluating them rationally, we lose clarity about trade-offs, values, and opportunity costs.
Biases are part of being human. You don’t need to try to eliminate them by becoming smarter, more successful, or more experienced. In fact, many highly accomplished people are especially vulnerable to them because confidence, identity, and past wins can make blind spots easier to miss.
What matters is awareness. If you can recognize when overconfidence, herding, recency bias, loss aversion, status quo bias, confirmation bias, negative narrative bias, or the endowment effect is shaping your thinking, you are in a much better position to make rational financial decisions that align with your actual goals. This is the basis of Rational Finance. If you’re aware of what’s happening, then you’re empowered to accommodate it.
That is a big part of the philosophy behind PFW Advisors. Financial planning should help you get clear on what matters, think more intentionally, and use wealth in the service of a life that is both prosperous and deeply fulfilling.