Loss aversion, related to sunk cost fallacy, makes individuals reluctant to admit defeat or make mistakes to avoid pain, regret, or shame while seeking pride. People with higher net worth tend to have lower loss aversion tendencies. Sunk cost fallacy can lead individuals to persist in failing businesses or investments due to emotional attachment or past sacrifices, despite objective evidence of failure. Mental accounting, where individuals assign different values to money, can also lead to irrational financial decisions, such as not realizing the overall impact of scattered accounts.
Dr. Charles and Dr. Brad talk about the usefulness (and lack thereof) of behavioral finance as it relates to financial planning practice. They then dive into several of the biases and heuristics that they see as most relevant to a practitioner and how each can be applied in practice.