Behavioral Finance: It’s A Feature, Not a Bug [or] Let’s Stop Talking About Behavioral Finance and Apply It

By Tim Maurer

Personal finance is more personal than it is finance. Initially, this was something I discussed with advisors that drew universal, if not anecdotal agreement because of the experiences we’d had with clients. Extensive research in the field of behavioral economics and finance has proven that this maxim isn’t just a catchy one liner, but rather a scientific fact. 

I bet you’ve heard of behavioral economics or behavioral finance by now. You may have even read one or more of the popular books on the topic. There are at least two problems with the way this wealth of information has been positioned and applied.

In many circles behavioral finance has been reduced to mere intellectual gymnastics – cocktail party chatter – rather than insight that can actually be understood and applied. “Oh yes, that sounds like recency bias!” or “Oh no, confirmation bias at its finest.” Maybe, “You’re anchoring again, honey.”.

Maybe, but so what? Is the mere recognition of an apparent cognitive conundrum a full understanding of its meaning?  Or more importantly, true understanding that can lead to applicable wisdom? In most cases, I think not.

Perhaps more importantly the second problem is that when attempts at application are made, they are often misapplied, perhaps purposefully. The primary misapplication often sadly comes from the financial industry — that could likely best employ the lessons of behavioral finance and economics on behalf of its clients. 

Too often, behavioral finance is painted as the field representing a host of financial foibles.. Words like bias, heuristic, rational, and irrational are trotted out in a universally pejorative light. They’re considered errors in human judgment, something to be feared—systemic foolishness that lies within that only the wise financial minds (and their assortment of products and services) can save you from. 

Thankfully, there are those in the field like Dr. Meir Statman, the Glenn Klimek Professor of Finance at Santa Clara University that are shifting the narrative. He effectively did so in his book, available for a free download thanks to the CFA Institute, Behavioral Finance: The Second Generation.1

I asked Dr. Statman, “Is the rational/irrational dichotomy that seems to mark behavioral finance an oversimplification?”.

“Absolutely!” he answered, enthusiastically.

My hope, therefore, is to give you a quick background of the field through the lens of some of its foremost researchers, thought leaders, and translators. I’ll offer a key insight for each followed by a proposed application—not as a researcher or “expert,” myself, but as a practitioner with a couple decades of experience helping people navigate the tenuous territory at the intersection of money and life.

Kahneman and Tvorsky – Systems 1 and 2

The first body of thought we address is the center around which the remainder largely revolves because behavioral economics and finance was incepted through the research and findings of Daniel Kahneman and Amos Tvorsky. Work that Kahneman summarized in his book, Thinking, Fast and Slow. 

The big revelation in their work was that the brain makes decisions in a dualistic fashion. 

They’re not talking about the much-publicized hemispheric split between the left and the right, but instead a split between two different processors in our brain – Systems 1 and 2. 

System 1 is fast, automatic, frequent, stereotypic and subconscious.  System 2 is slow, effortful, infrequent, logical, calculating, and conscious. System 1 would be the proverbial “gut” that we use to respond immediately and impulsively, while System 2 is the slower, more deliberate thinker. Which system would we prefer to use in making financial decisions? Hmm…we’ll come back to that. 

System 1 would be the proverbial “gut” that we use to respond immediately and impulsively, while System 2 is the slower, more deliberate thinker.

First, let me acknowledge that Thinking, Fast and Slow is a pretty dense read. A fantastic introduction to the lives and work of Kahneman and Tvorsky that I predict you’ll breeze right through comes from the author famous for taking seemingly lifeless, technical material and turning into a gripping narrative that reads like fiction – Michael Lewis – and the book about these two men, The Undoing Project. In fact, if you’re brand new to this field and you’d like to jump right in, you couldn’t do better than this book. 

A second book, Misbehaving, by the University of Chicago economist who actually coined the term, “behavioral economics,” Richard Thaler, is also surprisingly readable. 


Over 80% of our financial decisions are made with System 1. 

It’s sensible that we’d enlist the help of our rational System 2 for the type of decisions for which it seems best suited. However, the life-changing realization regarding the two systems for us is that the vast majority—80% or more—of the decisions we make, including, if not especially, decisions about money, we make with our instinctive processor, our gut, System 1. 

Lest you protest, insisting that you are more rational than most.  A hope to which I initially laid claim as a financial advisor, the studies suggest we just do a better job using our System 2 to rationalize the decisions we’ve made with our System 1! 

Practical Application

Slow down.

As we’ll soon discuss, System 1 decisions aren’t universally bad, but they are fast. Furthermore, when System 1 is engaged, it may well be that System 2 is disabled. Therefore, one of the best ways to improve our financial decisions is to layer an additional step in between impulse and purchase.

Especially for larger purchases and investments, the high-tech tool that has been well employed is the fridge magnet: When you’re about to make a major purchase, pause long enough to write down the item you want to buy. Then clip it to the fridge for a set period of time. If you still want it after a set time period that is proportionately appropriate for the size of the investment, spend away!

By the way, do you think major retailers understand Systems 1 and 2? Darn right – that’s how the “Buy Now” button came to be! Every additional step – even moving something to the cart and plugging in your address and credit card information slows the cognitive consumption process enough to meaningfully reduce the chances that we complete a purchase. 

Think about it. How often do you go back and buy the stuff in your “Save for Later” list, the Amazon equivalent of the fridge magnet? By slowing the purchasing process we naturally enlist System 2 and employ the fullness of our processing power.

Haidt: The Elephant in the Room 

Leave it to a couple brilliant researchers, though, to turn their field of economics on its head with groundbreaking insight regarding the brain’s dualistic processors and call it something as forgettable as System 1 and System 2! Fortunately, Jonathan Haidt has given us an excellent analogy in his book, The Happiness Hypothesis. 

He referred to Systems 1 and 2 as the (emotional) Elephant and its (rational) Rider. Thank goodness for alliterative analogies! Now let me tell you something you already know: 


When the Elephant and the Rider are in conflict, the Elephant wins. 

No surprise, right? I’d invite you to pause for a moment and acknowledge a recent instance when this happened. Go ahead, be honest with yourself. It might’ve been a menu selection, the purchase of a new television or car.

I’m convinced that the only reason we’re able to voice command a 75-inch television to buy another tub full of peanut butter-filled pretzels to be delivered within the hour,or buy a car that can accelerate from 0-to-60 in under three seconds is the existence of System 1 (Perhaps for that, we should be thankful?).

Indeed, we have a tendency to presume the Elephant is the problem, the big dummy ruining the well-conceived frugal intentions of the rational Rider. Chip and Dan Heath, however, in their book, Switch, , invite us to consider that the Elephant may not be the enemy and could be our biggest ally.

Practical Application

Get to know the Elephant in the room – which is to say, yourself.

Our System 1 has been formed in numerous ways. Yes, nature played a role as we were forced to make snap decisions to stay alive or find food millennia ago, but nurture plays a big role tooThat’s why many of our impulses are different than those of others. Our respective System 1s are especially crafted in the first foundational 10 years of life. 

In the excellent book with the funny name, The Financial Wisdom of Ebenezer Scrooge, financial planner/psychotherapist trio of Rick Kahler, Ted Klontz, and Brad Klontz introduce a helpful term: Money Scripts. It’s as though our foundational and transformative experiences in life create a subconscious script that is running in the background that guides our impulses.

How do you respond when a homeless person asks you for money – and be honest, there’s no judgement here. Do you ignore them? Do you immediately reach for your wallet? Do you keep a few bags of pre-prepared sustenance for just such an occasion? Or do you roll the window down to offer some insight into the value of hard work? 

How about when Gordon Gecko defiantly declares, “Greed is good!” in the classic movie, Wall Street? Do you cringe, but acknowledge some merit? Are you repulsed? Or do you offer a hearty, “Amen!” 

Regardless of how you respond instinctively, it’s likely not to your fault or credit – it’s your System 1 acting in that moment. Our “Money Scripts” aren’t good or bad; they just are. But we can do well to name them, bringing them into the open. Maybe you’ve got a “Poor people are poor because they were lazy” script running – or a “Wealthy people got that way by working hard” script, just to name a couple.

Yet here’s where things get interesting.

Chip and Dan Heath: Training the Elephant 

You see, we have a tendency to presume the Elephant is the problem, the big dummy ruining the well-conceived good intentions of the rational Rider. Chip and Dan Heath, however, in their book, Switch, invite us to consider that the Elephant may not be the enemy and could be our biggest ally. 


“[T]he Elephant also has enormous strengths and the rider has crippling weaknesses.” 

What could be a strength of the Elephant? Well, its strength! When the Elephant is convinced, there’s no stopping it, both for worse and for better. It, not the rider, is the primary source of our resolve. Believe it or not, it’s trainable.

So, we can see the strength of the Elephant, but what could possibly be a weakness of the Rider? Yes, let’s sum it up with the term “analysis paralysis.” My father, for example, is a retired electrical engineer, and if you know any of them, you know that electrical engineer isn’t just a profession – it’s a personality type. My dad could analyze even the best opportunity, whether related to investing or ice cream, until it doesn’t look good any more. 

Practical Application

Train the Elephant.

Yes, we can change our Money Scripts. Pause long enough to acknowledge and name your Money Script. At that point, you can decide if it matches with your more thoughtful intentions. If not, you can seek to change it – either through a transformative experience or simple habit, like going on a service trip to the third world or regularly serving at a homeless shelter. 

Most of us, however, fall on a spectrum of risk acceptance that can tolerate some level of market volatility. That doesn’t mean when things go crazy that you don’t need a little guidance.

I’ll give you another example: How do you respond to market volatility? While I’ve worked with some people who had experienced something so traumatic with the market—typically those who were touched by the Great Depression, directly or indirectly—who simply couldn’t bring themselves to expose their portfolio to risk (And in that case, by the way, they shouldn’t.).

Most of us, however, fall on a spectrum of risk acceptance that can tolerate some level of market volatility. That doesn’t mean when things go crazy that you don’t need a little guidance. This is one of the simplest—and most beneficial roles that a financial advisor plays in the life of a client: behavioral coaching. 

So by all means, when your heart starts racing, call your financial advisor. The next time it happens, call her again. And again. I’d be willing to bet you that the time will come when your impulse starts to change, when you, like your advisor, begin to respond to a market downturn with acceptance, at the least, if not an opportunistic instinct.


The most calming and encouraging insight I have to offer comes courtesy of our friend, Dr. Statman who counsels that we might be wise to drop the labels of “rational” and “irrational,” and simply accept that whether as investors, savers, spenders, givers, or just plain humans, we’re actually quite “normal.”

Yes, we’re wired a certain way, through our biology and our psychology, but that wiring is vastly more complex than we might expect. For too long, economics has expressed our financial decision making through the single lens of utility. Let’s look at an example of this through our choice of clothing.

Through a purely utilitarian lens, spending any more than the minimum required to cloak ourselves in seasonably appropriate garb is wasteful. Clothing is, after all, a depreciating asset. But there are two other lenses to be considered. 

Beyond utility, the second is the expressive lens. Indeed, we are expressing something about who we are as a person in how we dress, whether we like it or not. The Franciscan Friar’s plain brown habit expresses that he is simple and uniform in the collective mission of his brothers, while the Army officer’s stripes express her hierarchical rank. The power suit sends a message of seriousness, but that’s almost certainly not the message you’re planning to send at the outdoor music festival. A shiny Rolex watch screams “success,” while a Timex Ironman says, “I’m fit.” Athleisure says the same if you are fit; otherwise, it expresses that you really wish we’d have another shutdown so you can wear pants with an elastic waistband 24/7. 

The third and final lens is the emotional. Have you ever grabbed a particular sweatshirt because it made you feel not just comfortable, but comforted? Or because it reminded you of a vacation that brought back amazing memories? Maybe you pulled on a pair of jeans because they signaled it was time to relax after work—or because they made you feel better about your body. 

The point is that all three of these lenses are real and valid, and that our human hardwiring, much of which is illuminated through the fields of behavioral economics and finance, are purposeful and surprisingly fluid. Perhaps our anchors, heuristics, and biases aren’t bugs, but features.

This article was originally published on May 16 2022

About the Author

Tim Maurer, CFP®, RLP® is Head of Wealth Management for Triad Financial Advisors. A central theme drives his writing: Personal finance is more personal than it is finance. Tim’s second book, Simple Money, applies the academic findings of behavioral finance to the discipline of personal finance.  He is a CNBC contributor and also writes for Forbes.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.