### Exploring Behavioral Finance: How Cognitive Biases Influence Your Financial Choices

Behavioral finance, an important subset of behavioral economics, delves into the psychological factors that impact our financial decision-making processes. Contrary to classic finance theories that presume humans act rationally, behavioral finance reveals how emotions, biases, and heuristics can lead us in the wrong direction. From overestimating our investment knowledge to following the crowd in speculative activities, or selectively gathering information that supports our existing beliefs, these cognitive biases can have significant repercussions in the financial world.

In a recent episode of the **KevinMD Podcast**, certified financial planner Shane Tenny discussed the influence of behavioral finance on decision-making, particularly for high-achieving professionals like doctors. Drawing from his experience as managing partner at Spaugh Dameron Tenny, LLC, and host of *The Prosperous Doc* podcast, Tenny detailed the behavioral traps and practical techniques to mitigate them.

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### Understanding Behavioral Finance: Its Importance

At its essence, **behavioral finance** acknowledges that human conduct often strays from rationality. While external factors like market trends and tax regulations undeniably shape financial results, Tenny points out that internal elements, such as our decisions and biases, hold an equally critical—if not more important—role. This holds particular significance for highly paid professionals, like physicians, who may find that their education and knowledge can unexpectedly hinder them in making wise financial choices.

Tenny’s favorite quote encapsulates this truth: *”Human behavior destroys more wealth than the markets ever will.”*

The field of behavioral finance emerged in the late 20th century, led by influential thinkers like Daniel Kahneman, a Nobel Prize winner and celebrated author. Kahneman’s research shed light on how psychological tendencies impact decision-making, demonstrating that human choice is seldom as rational as it appears.

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### Major Behavioral Biases That Affect Financial Well-Being

Tenny pointed out three prevalent behavioral biases that often ensnare individuals—particularly physicians—when it comes to financial management:

#### 1. Overconfidence Bias
This bias manifests when individuals misjudge their knowledge or competence in making informed choices. Physicians, who are adept in their specialized medical fields, may carry this assurance into less familiar territory like finance. Tenny noted that this characteristic can lead to perilous choices, such as heavily investing in a single stock, industry, or initiative without comprehending the associated risks.

#### 2. Confirmation Bias
This bias reflects the inclination to seek out information that supports existing beliefs while ignoring information that contradicts them. Social media platforms exacerbate this bias by presenting users with content that aligns with their interests and past engagement. For instance, a physician might be alerted to conversations about potential currency instability and, after seeking out articles that support this viewpoint, choose to allocate all their resources into alternative currencies—overlooking broader, nuanced guidance.

#### 3. Herd Behavior
The urge to conform to the group can be compelling, particularly in social scenarios like physician lounges or networking gatherings. “If everyone is investing in this real estate project, it has to be a wise choice,” is a common sentiment. While some collective endeavors might succeed, others—such as speculative investments—can heighten risk, as decisions are often driven by peer influence rather than thorough evaluation.

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### Practical Outcomes: A Physician’s Experience

To illustrate these biases in action, Tenny shared a painful account from a real-life client. In this example, a young physician was lured into a communal real estate investment after hearing about it from peers. Despite Tenny’s prudent warnings—pointing out the investment’s illiquidity and its speculative financial projections—the client persisted, influenced by overconfidence, confirmation bias, and herd behavior.

Regrettably, unexpected events like the COVID-19 pandemic led to substantial losses as tenants abandoned properties, and the physician found himself struggling to recuperate. Tenny stresses that while market declines can be unavoidable, the failure of this particular investment was largely avoidable.

When cognitive biases distort judgment, irrational choices frequently lead to enduring repercussions.

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### Methods to Reduce Cognitive Biases and Make Better Decisions

Recognizing these biases is merely the first step; Tenny provided actionable techniques to help individuals—and especially physicians—make more rational financial decisions:

#### 1. **Diversification**
Avoid putting too much of your investment into a single asset, industry, or initiative. A diversified portfolio minimizes risk, reducing the chances that one error will disrupt long-term financial objectives. Tenny underscored that maintaining diversification provides a safeguard against both market fluctuations and behavioral pitfalls.

#### 2. **Consulting Third-Party Perspectives**
Tenny strongly encourages securing the advice of a financial advisor or a dependable third party. Professionals often gain insights from an external viewpoint that offers unbiased perspectives. Whether it’s a partner, a colleague, or a certified planner like Tenny, an outside opinion can help redirect decisions toward rational considerations.

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