Heuristics & Biases

20 June 2025
2 min read
Heuristics & Biases

Human behaviour is even less rational than we think: the rational mind can be easily overwhelmed, causing us to make emotional decisions—or look for simpler questions to answer. Here are five common biases and heuristics—mental shortcuts—to be on the lookout for.

  1. Loss Aversion Colours Investors’ Worlds

    Humans tend to experience the pain of losses more acutely than they feel the pleasure of gains. In fact, the “loss aversion” heuristic reveals that investors’ motivation to avoid pain is almost three times as powerful as their pursuit of pleasure.

    That makes it easy to understand why investors are often jarred by watching or reading the news. The stories are never all positive; journalists always find something to warn investors about. Clients’ emotions get activated when a message includes anything negative. This makes investment professionals’ jobs much more difficult.

  2. Anchoring: A Shield from Pain

    Another heuristic is anchoring. Anchoring is the normal tendency to vividly recall negative experiences. A traumatic or painful experience, like an investment loss, registers deeply in people’s brains—it helps us learn from the past and protect ourselves in the future.

    Here’s the challenge this behaviour creates: Once we’ve had a painful experience, we tend to see the possibility of that experience everywhere we look. Humans create an anchor to that painful experience, and they feel that the negative event is much more likely to happen again.

  3. Availability Bias Produces Faster—Not Necessarily Better—Decisions

    Availability bias is the brain’s likelihood to focus on the choices that come first to mind, instead of sorting through all the available options. Daniel Kahneman, a leader in the field of behavioural science, calls this “the retrievability of instances” in his 2011 book, Thinking, Fast and Slow.

    For investors, availability bias can be viewed as the tendency to focus on a stock or specific investment style that has recently received a lot of press. 

  4. Safety In Validation: Social Proof

    What is social proof? It’s when humans look at what others do to confirm that their own decision is valid. This is sometimes known as herd behaviour. Do you look at what other advisers do to confirm your own decisions? Warren Buffett once said about being a successful investor: “Be greedy when others are fearful. And be fearful when others are greedy.”

  5. Safety In Validation: Confirmation Bias

    The search for alternative paths, and questioning familiar choices, is a painful and time-consuming process. Instead, our subconscious minds activate a confirmation bias—looking for validation that the previous decision was right. This might even involve ignoring evidence that there was a better option.

    This heuristic protects the decision-maker from that pain and effort. As Kahneman said, “Contrary to the rules of philosophers of science, who advise testing hypotheses by trying to refute them, people (and scientists, quite often) seek data that are likely to be compatible with the beliefs they currently hold.”

    Learning more about heuristics—and how they work—helps us recognise when they become activated in our clients and ourselves. Fortunately, it’s possible to recognise many of the common decision-making vulnerabilities that advisers are prone to. Understanding these vulnerabilities allows you to take action by helping clients see how their behaviour may be causing them to make poor decisions.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams, and are subject to change over time.

AB – Australian Financial Advisers & Brokers Only
Terms and Conditions

This information is only intended for:

(a) Australian financial advisers that are licensed under Chapter 7 of the Corporations Act 2001 (Cth) to provide financial product advice (Financial Adviser); or 

(b) authorised representatives of a Financial Adviser (Authorised Representative).  

If you are unsure whether you qualify under either (a) or (b) above, please seek independent legal advice.  By clicking "I Accept" below you represent and warrant that:

You are either a Financial Adviser or an Authorised Representative; and You acknowledge that the information contained on this website is intended for Financial Advisers and Authorised Representatives only and must not be distributed, directly or indirectly, to retail clients; and You acknowledge that the information contained on this website is being presented solely for your general information and may not be reproduced or republished, in whole or in part, for any purpose.

Cancel