Why Your Brain Makes Bad Money Decisions Feel Right

Losing £100 hurts about twice as much as gaining £100 feels good. That ratio has been measured, and almost everything below follows from it.

1. Loss aversion

People hold a losing investment and sell a winning one. Selling the winner feels like collecting. Selling the loser feels like admitting. So the portfolio fills up with everything that went wrong.

2. Sunk cost

You are an hour into a bad film. Almost nobody leaves, because the hour feels like an investment. It is gone either way. The only question is the next hour.

Money you have lost cannot be recovered by holding on. But leaving makes the loss real, and holding lets it stay theoretical. That is why people buy more of something they would never buy today.

3. Recency

The brain weights the latest thing too heavily. Three good weeks feel like a trend. Three bad ones feel like the end.

That is useful when something is chasing you. It is expensive when you are judging a system that runs in years.

4. Confirmation

Once you own something, you stop reading about it neutrally. Arguments that agree with you feel like information. Arguments that do not feel like noise.

The internet then shows you more of what you engaged with. Your conviction rises while the evidence stays the same size.

5. Anchoring

The first number you see becomes the measure of everything else. If you bought at a high price, that price starts to feel fair.

It is why people wait to "get back to even". That is not a price. It is a memory. It is also why every sale price sits beside a crossed-out one.

6. Overconfidence

Ask a room of drivers how many are above average and most hands go up. In investing the effect is stronger in people who have just won.

A good result is remembered as skill and a bad one as bad luck. Confident people trade more, and trading more loses money.

7. The herd

Being wrong alone hurts far more than being wrong with everybody else. So the crowd is a source of comfort, not information.

That comfort peaks when the crowd is largest, which is also when nobody is left to join it.

8. Survivorship

You only hear from the people it worked for. Nobody posts a screenshot of the loss.

The strategy looks reliable because the failures are invisible, not because they are rare. This is the business model of anybody selling you a system.

9. Ownership

The moment something is yours, you value it more. Give people a mug and they will not sell it for the price they would have paid for it.

The research you did is stored in you, not in the asset.

10. House money

After a win, people take risks they would never take with their original money, as if the profit were not really theirs. It is theirs. Money does not know where it came from.

This is why the biggest losses tend to follow the biggest wins.

None of these is a mistake

Every one is a shortcut that works very well in ordinary life. Weighting the recent thing, following the crowd and fearing loss kept people alive for a very long time.

They fail in one environment: where results are delayed, noisy and uncertain. That describes money, and almost nothing else our brains were built for.

The short answer

You cannot remove these shortcuts. Nobody can, and anybody who says otherwise is using several of them on you.

The one thing that works is to decide what you will do before you feel anything, write it down, and then do the boring thing you wrote.