How to Make Better Money Decisions: 8 Biases to Beat

Why do smart people make poor money decisions?

Because money decisions are rarely made by the calm, informed person who reads articles like this one. They are made in a car showroom, at a family dinner, in a WhatsApp group or on the last day of a benefits enrolment window. In those moments the mind takes shortcuts.

The study of those shortcuts is called behavioural finance, or behavioural economics. Daniel Kahneman, working for many years with Amos Tversky, received the 2002 economics Nobel for bringing psychological research on judgement under uncertainty into economics; the two had developed prospect theory to describe how people really weigh gains and losses. Richard Thaler received the 2017 prize for contributions that include mental accounting, the endowment effect and the study of self-control.

The practical message of that research is encouraging. If mistakes were random, nothing could be done. Because they are predictable, you can build small safeguards around them. In our workshops at Bodhih we find people grasp this fastest through stories: a recognisable person making a recognisable choice.

Which money biases cost people the most?

Dozens have been named. These eight account for most of the expensive moments in ordinary financial life. Read the middle column and notice which ones you have said aloud.

How does present bias stop me saving, and what fixes it?

Present bias is the tendency to give today's pleasure much more weight than a later reward. It is why 'I'll start next year' feels sensible every single year. The cost is hidden because compounding rewards time more than effort. Someone who saves a fixed amount for ten years and then stops can end up with a similar pot, decades later, to someone who starts ten years late and saves the same amount for thirty years. The exact comparison depends on the return, which nobody can promise, so run it at a cautious, a middle and a hopeful rate.

The fix is to take the decision once and then remove yourself from it. Set an automatic transfer for the day after payday, even a small one. Then borrow an idea associated with Richard Thaler and Shlomo Benartzi: decide now that a share of every future raise goes to savings before it reaches your spending account. You never feel a loss, because you never held the money.

If you are starting late, the same logic applies in reverse. Too late for the ideal plan is never too late for a plan. Count the working years you have, look at what you can control (how much you save and how long you work) and resist the temptation to chase high returns to catch up.

Why do windfalls, bonuses and raises disappear so fast?

Thaler's term mental accounting describes how we label money by its source. Salary is serious. A bonus, a refund, an inheritance or a win feels like extra and gets spent by looser rules, often on other people's timetables. A raise does something similar in slow motion: each new comfort becomes normal within weeks, so spending rises to meet income and the cushion never grows.

Two rules help. For a windfall, park the whole sum somewhere safe and dull for 30 days and tell anyone who asks that it is tied up. Then follow a written order, for example: clear high-interest debt, top up the emergency fund, a fixed guilt-free share to enjoy, a share to give, and the rest towards long-term goals. For a raise, fix your split in advance. Spending half of each raise still improves your life every year while your savings rate climbs.

• Windfall order on one line: debt, cushion, enjoy, give, long-term.
• Raise rule: decide the share you keep before the raise lands.
• Check how windfalls are taxed where you live before you plan.

How do I avoid investment scams and 'guaranteed' returns?

Fraud is a large and growing cost. The US Federal Trade Commission reported that consumers lost more than $12.5 billion to fraud in 2024, with investment scams the largest category at $5.7 billion. Those are reported losses in one country only.

Scams work because they recruit your biases. Herd behaviour: your friends are in, so it must have been checked. Affinity: the offer arrives through a church, an alumni group or a relative. Loss aversion: when a payment is late, adding more feels safer than walking away. Early payouts prove nothing, because in a Ponzi scheme they are paid from other members' deposits.

The SEC's Investor.gov lists warning signs that include high returns with little or no risk, overly consistent returns, unregistered investments, unlicensed sellers, secretive or complex strategies, problems with paperwork and difficulty receiving payments. Translate that into three habits.

• Treat 'high' and 'guaranteed' in the same sentence as a stop sign.
• Look up the firm on your regulator's official register yourself, never through a link they send.
• Before money moves, call one sceptical person who is not in the scheme.

How big a risk is too big? Houses, single shares and insurance

Three very different decisions share one test: could you live with the worst realistic case?

For a home, anchoring is the danger. Once a lender names the maximum, your own budget starts to look timid. A lender is asking whether you will probably repay. You need to ask whether you will still have a margin for bad luck. Write your payment at today's rate, at two points higher, and with household income cut by a fifth. If the last line frightens you, the house is too big. Remember too that renting is not automatically worse than buying; it depends on price, rate, running costs and how long you stay.

For investments, the danger is concentration, especially in your employer's shares, where your salary and savings would fall together. Familiarity feels like safety and is not. Diversification does not prevent losses, but it stops one piece of bad news deciding your future. A useful question: if I held cash instead, would I buy this much of it today?

For insurance, the bias runs the other way. We judge a premium by the likely outcome (nothing happens) and call it wasted. Judge it by the worst case instead. A 2023 report by the World Health Organization and the World Bank estimated that about two billion people face financial hardship because of out-of-pocket health spending. Insure what is rare but ruinous, and save for what is likely but small.

Should I lend money to family or go into business with a friend?

These are the decisions where money and relationships collide, and where people skip the paperwork because asking for it feels like distrust.

For family loans, a rule repeated in most cultures holds up well: lend only what you could afford to give. If losing the sum would damage your own safety net, offer a smaller amount, a gift, or help in kind. If you do lend, write down the amount and the dates. A note protects the relationship as much as the money, because each side otherwise remembers a different agreement.

For partnerships, the planning fallacy (our habit of planning for the best case) means friends agree the exciting parts and postpone the awkward ones. Settle in writing who owns what, who is paid what, which decisions need both of you and what happens if one wants out. It is usually success, not failure, that exposes an unwritten deal. Laws differ by country, so have a qualified local lawyer turn your answers into a proper agreement.

What is a simple checklist for any big money decision?

Five steps cover most situations. They take about fifteen minutes, plus a night's sleep.

The fourth step, the pre-mortem, comes from the psychologist Gary Klein, who described it in Harvard Business Review as assuming a plan has already failed and then generating plausible reasons why. It works for households as well as projects because it gives everyone permission to voice doubts before the commitment and not after.

The fifth step matters more than it looks. Outcomes are noisy: a careful decision can turn out badly and a careless one can get lucky. Only a note written beforehand shows which was which, and that is how judgement improves over the years.

• 1. Slow down. Whose deadline is this? Sleep on it; wait 30 days for a windfall.
• 2. Work out a range: cautious, middle and hopeful. Would it still work in the cautious case?
• 3. Ask one outsider who gains nothing either way, and tell the person you share money with.
• 4. Run a pre-mortem: it is two years from now and this went badly. Why?
• 5. Write the decision down with your reasons, your confidence and a review date.

How can I practise financial judgement without risking money?

Judgement grows from cases. You can wait decades to collect your own, or you can borrow other people's. Read or tell stories about money decisions, stop before the ending, and ask yourself what you would have done and why it would have felt reasonable. Do it with a partner or a group and you also learn how differently other people see the same situation.

That is the idea behind The Money Stories kit from Bodhih Training: twelve short fictional stories, each followed by the principle, the numbers as a range and a decision lab, with a workbook that lets you change the figures to your own. If you want a measured starting point, the Money Decision Judgment assessment on AssessAll gives you a score to revisit later, and the WOOP method described on Jobulary is a good way to turn 'I should save more' into a plan with an obstacle and an if-then response.

Whatever you use, keep the standard honest: no product tips, ranges and scenarios in place of promises, and a qualified, registered adviser for decisions that are large or irreversible.