Hidden Traps of the Mind: How Cognitive Biases Impact Your Investment Decisions

By Brian Watson, CFP®, CDFA®, Hartley Carlson, and Emily Lusk

Imagine it’s 1908. The Model T has just hit the market, and you have the means to buy one. Would you trade in your horse and carriage for this groundbreaking invention? Fast forward a century when Google revolutionized the way we search for information. Did you dive in or stick with the comfort of library stacks? When the first iPhone debuted, were you eager to upgrade or loyal to your flip phone?

In hindsight, these choices may seem obvious, but in the moment, embracing change often feels uncomfortable. This natural resistance is called Inertia Bias, and it shapes far more of our decisions than we might think.

A few years ago, we began working with a client, let’s call him John. John worked at a company for over three decades before he retired. During his tenure, he amassed over ten million dollars in that company’s stock. John is a conservative investor. He’s hesitant to diversify or make any changes to his portfolio, because that is what he’s used to. He believes that because his portfolio has always contained this stock, it must be safer than making a change. What John doesn’t realize is half of his portfolio is tied up in a single company, leaving him open to both market and business risk. If the company were to endure hard times, file bankruptcy, or go out of business, the stock could plummet in value. John’s comfort is not rooted in market knowledge or some secret formula to success, John’s comfort is rooted in familiarity. John is facing inertia bias – the tendency to resist change due to a comfortability in the status quo.

Inertia bias is one of many cognitive biases that quietly influence how we make investment decisions. The most concerning aspect? Many people aren’t even aware these biases exist, while they actively shape their behavior. As humans we like to think of ourselves as rational beings, acting as pure logical decision makers. Yet research in behavioral finance consistently shows we are often influenced by unconscious thoughts and emotions that cause us to simplify complex information or make quick judgments. These mental shortcuts create a disconnect between our financial intentions and our actual behavior.

Circling back to John’s situation, it was essential to acknowledge and validate the emotional attachment involved. This holding is meaningful to John; it’s part of his story. By honoring that connection, we minimized defensiveness and opened the door to a more thoughtful, collaborative conversation. This allowed us to gently shift the focus toward the real concern: the concentration risk of having such a high percentage of his portfolio tied to a single company. We outlined how reducing this concentrated position strengthens his overall strategy through improved diversification. Furthermore, instead of an all-or-nothing approach, which may not align with John’s preferences, we proposed a phased strategy to gradually reduce the position. Our goal is to act as a behavioral guide and advocate, not just as an advisor.

These biases should not be viewed as flaws. In fact, the ability to recognize them is a strength, offering you a deeper understanding of the hidden forces that shape the human mind and our behavior.

This is where working with a fiduciary becomes invaluable. Whether it’s Koss Olinger, or a firm like ours, we act in your best interest to bring structure and objectivity to the investing process. By understanding the psychology behind your decisions and partnering with someone who puts your interests first, you can invest more intelligently, and with greater peace of mind.

This is the first in a series of articles exploring real examples of the most common cognitive biases that influence financial decision-making. Stay tuned to learn how awareness, strategy, and sound advice can turn these biases from blind spots into strategic advantages.

Advisory Services offered through Koss Olinger Consulting, LLC. An SEC Registered Investment Advisor. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

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