13 Cognitive Errors You May Be Making When Thinking About Money

People are not always rational agents. We all make mistakes – this is what makes us human. However, for the longest time, economic theory has made assumptions about behavior in financial markets based on human behavior being rational. Because of this gap between theory and reality, Behavioral Finance, which focuses on the influence of psychology in the decision-making process of investors, has become an integral part of financial planning. This discussion will touch on the 13 cognitive errors you may be making when it comes to your finances, how they can affect your investments, and how to avoid them.

1. Illusion Of Control

With this bias, you believe you can control the outcome of an event you have no control over. World-diversified portfolios can offer diversification and potential return benefits to investors but maybe you believe you should only be investing in the United States because as a resident, you believe you have more control over how those companies do.